Spirit Airlines: $25 Is Just The Start

Summary

• Spirit Airlines more than tripled to $25 on the recent rebound.
• The airline has plenty of liquidity now as cash flows approach break-even.
• The stock faces dilution by up to 40 million shares.
• Spirit has upside from limiting dilution and obtaining a higher P/E multiple when normalized income returns.
• This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Get started today »

After the recent rally in the stock, some investors are quickly cashing out of those big gains in Spirit Airlines (NYSE:SAVE). The airline had more than tripled off the bottom, but the stock still has plenty of upside with the dip back to $20 now. My investment thesis remains highly bullish on the airline stock in part due to the concept of the previous disaster discount for the sector disappearing after surviving the virus which nearly shut down the industry.

Image Source: Spirit Airlines website

Eliminating Cash Burn

Most of the airlines provided daily cash burn numbers back towards early May before the real rally in passenger traffic. Spirit Airlines reported Q1 results on May 6 and the company repeated the $4 million daily cash burn estimate via the May 19 presentation.

A lot of the cash burn figures in the industry were provided before the traffic surge over Memorial Day weekend. The airlines appeared reluctant to include improving bookings estimates in the daily cash burn figures when traffic was still over 90% below 2019 levels. Since the traffic jump starting with the Thursday prior to Memorial Day on May 25, traffic has nearly doubled to over 16% of 2019 levels.

As noted in my research, the $4 million daily burn rate doesn't include the $1.5 million in Payroll Support Program payments. The true burn rate was only $2.5 million and daily cash flow from bookings should've doubled here in the last couple of weeks.

The airline averaged about $11 million in daily revenues in the last Q2 so revenues near 15% of 2019 levels equate to over $1.6 million in daily revenues. The biggest issue in the numbers provided by the airlines was the focus on cash burn rates focused on net bookings versus earnings. Investors can't easily tell the level of refunds.

The airline now has plenty of liquidity so bookings aren't as relevant as earnings considering the access to $2.4 billion in liquidity. Spirit Airlines hasn't pulled down the $741 million loan from the U.S. Treasury, but the amount is still on the table in exchange for warrants and collateral.

Source: Spirit Airlines May 2020 presentation

The possibility even exists for cash flows being closer to break-even soon with higher booking levels in July and August as the economy continues to reopen. As refund requests decline, the extra bookings from forward months will contribute to incoming cash flows.

Low-Cost Leader

With the vast majority of returning traffic focused on domestic locations, Spirit Airlines has an advantage over the competition. The company is mostly focused on domestic traffic with limited destinations in Latin America and the Caribbean.

With any price war, the airline is positioned as the lowest-cost provider. Spirit Airlines has costs roughly half that of the legacy airlines at 5.58 cents per available seat mile while even Southwest Airlines (LUV) is up at 8.40 cents per available seat mile.

Source: Spirit Airlines May 2020 presentation

Spirit Airlines already charges everyday low prices making it virtually impossible for legacy airlines to undercut their fares and generate anything approaching positive cash flow. Spirit Airlines has long promoted pricing fares under the break-even price needed by competitors. Southwest Airlines' CEO promoted the fare war concept, but the industry just doesn't have any benefits from seeing losses mount via brutal pricing competition.

Price Upside

A lot of the questions regarding value want to view Spirit Airlines based on the pre-virus level discounted by the damage done via share dilution to obtain funding to survive the coronavirus crisis. An investor seeing a stock trading in the $40s back in February might mistakenly see the stock as maxed out near $25 based on this share dilution:

• Q1 shares outstanding = 68.5M
• PSP warrants = 0.5M
• Share offering = 20.1M
• Convertible debt offering = 13.7M
• Loan Program warrants = 5.3M
• Q2 shares outstanding = 108.1M

Investors need to step back and realize the convertible debt and warrants can be cancelled via cash payments. Absent a big rebound in cash flows, Spirit Airlines may not have the cash to convert the debt into cash versus shares.

The airline generated a 2019 EPS of $5.09 and had plans for the 2020 EPS topping $6.00. Clearly, the stock was priced for a disaster only reaching $40 on these earnings numbers.

The stock regularly touched $60 in the past few years questioning if investors shouldn't view those levels as the normalized prices, not the $40 highs heading into fears of a recession. Surviving this recession should help release the equity from this discount and allow Spirit Airlines along with other airline stocks to trade closer to market multiples realizing that bankruptcy is no longer a financial tool in the sector.

My view is that Spirit Airlines is able to convert a large portion of the debt into cash, not stock, to reduce dilution. In addition, the airline is unlikely to need the majority of the $741 million put aside for the Loan Program via the CARES Act. Less debt will reduce the warrants issued to the U.S. Treasury while the airline will still have the option to purchase any issued warrants before conversion.

Using a pre-virus $6 EPS estimate and 68.5 million shares outstanding, Spirit Airlines was expected to generate $411 million in net income. The EPS targets based on updated share counts are as follows:

• 88M shares = $4.67
• 100M shares = $4.11

With a more normalized earnings environment in 2021 which appears very likely considering how traffic is already rebounding in early June, Spirit Airlines will trade far above the recent $25 highs on an EPS target above $4 despite the dilution. My target has the airline stocks reaching forward P/E targets of 12 placing the stock price target closer to $50 on the low end and $60 on the high end.

Takeaway

The key investor takeaway is that the recent rally to $25 is just the start for Spirit Airlines. The dip to $20 today is an opportunity to own the airline stock below long-term value. The market is worried about a second virus wave providing the opportunity to own this stock on the cheap.

Analyst’s Disclosure: I am/we are long SAVE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Comments

[John Gilluly]

A big weekend for airline traffic. Numbers hit just shy of a million (968,673) for the first time in the recovery on Friday, September 4.

The big news is the comps between 2020 and 2019. There was a rapid gain of 6% in 6 days for the 7 day average, when compared to 2019.

I had been concerned when recovery traffic began to plateau - then go down slightly - on August 21, 2020. But that is just seasonal markings, as students go back to school and summer ends. It would have gone down in any year.

But how did our slight-receding go this year, say compared with normal years, like 2019? It shot-up 6%, to 36%, before receding back down to 35% on Sunday.

There's more. The 2019 traffic had begun to recede on July 21, 2019, and by this time last year, the 7 day average had already receded 23% from its summer highs.

The 7 day average in 2020 began to recede for the first time on August 20, 2020, and to date has only gone down one-half of one percent (0.005). So there is much strength underlying the current numbers when compared to previous years.

See Charts:

TSA Daily Data drive.google.com/...

TSA Daily Comps 2020-2019 drive.google.com/...

[Stone Fox Capital]

@John Gilluly

Traffic on 9/7 topped 900K for the 2nd time in the recovery. Technically, traffic over the last week was 35.6% of 2019 levels.

9/7/2020 935,308, 40.8%

8/31/2020 711,178, 31.2%

8/24/2020 726,788, 30.8%

[John Gilluly]

TSA Passenger numbers continue to rise on a week to week basis (for example Monday to previous Monday, Friday to previous Friday) at a very steady 1.9% CAGR. Since the end of July it's been like the USPS - "Neither rain nor shine" preventing the numbers from rising.

It is my conviction that investors who buy domestic airlines (SAVE, LUV), or some international exposure (DAL, DLAKY, JETS), will be well-rewarded in the latter part of the year. The unfortunate outcome - or surprise absence - of a fiscal stimulus, is likely being viewed by investors as a second-wave delay of the economic recovery. But that too will be temporary. The outcome is progressing, but at a slower pace

TSA weekly comps 8.18.20

See: drive.google.com/...

TSA Daily Data 8.18.20

See: drive.google.com/...

[John Gilluly]

Most recent chart-updates for TSA passenger numbers. A new high ($833k) has been reached. If this continues, we could have a breakout to the upside. The numbers have been consolidating for about 7-8 weeks:

1) drive.google.com/...

2) drive.google.com/...

[Purewater]

I was told $25 was just the start? It's $18 now. Sad

[John Gilluly]

You don't like to buy good stocks on the cheap?

[Stone Fox Capital]

@Purewater

$18 is even better.

[John Gilluly]

New Coronavirus infections continue to drop, down about 7,000 from last Monday.

Spirit airlines (SAVE) came out with an investor note this morning that air-traffic had begun to slow in the last days of July, causing them to consider job furloughs for 2,000 employees going forward. See: seekingalpha.com/...

"July capacity was down only 18% year-over-year compared to down 79% in June. Unfortunately, however, the increase in demand reversed as we saw increases in COVID cases and state-imposed quarantines."

The stock sold off 7% early on the news. But if you are are familiar with the TSA daily passenger numbers nationally (which hit a new high this weekend for the first time in a MONTH), air traffic in July was down 74% of normal for the entire month.

If Spirit Airlines (SAVE) was DOWN only 18%, that is very, very good, doing much better comparatively than their competition. I am assuming it would be similar for Southwest (LUV).

See most recent TSA chart: drive.google.com/...

A competent stimulus package to get us through the next 5 months would be highly-appreciated by the electorate (and investors). Congressional Incumbents have a choice, and a chance, to reduce defeat(s) in the November polls.

I would view a sell-off from lack of a stimulus package as a further buying opportunity. The vibrant, radical rallies in March, April, and June were all on the hopes of an imminent return to normal. Imagine what the "real thing" (the actual event) would be like?

[John Gilluly]

Spirit Airlines (SAVE) has plateaued for a month, exactly as the TSA daily passenger data has done (7 day average is approximately 665K). See 2 charts below.

See TSA chart: drive.google.com/...

See SAVE chart: drive.google.com/...

At the first sign of an effective remedy (one that keeps you out of the hospital) or a vaccine, the charts should resolve to the upside.

I believe the move up from the Mid-May lows to June 8, 2020 accurately expresses the arc of recovery when an exit to the recession appears imminent.

In 2008-2009, that took approximately 5 months. In 2020, the 5 month mark would be mid-August.

[John Gilluly]

TSA Daily Data: drive.google.com/...

[ventureCapital]

Long SAVE, and the reason for this is we can't compare last year's traffic data at this juncture until we see what Q2-Q3 data tells us (load factor etc) - what I can tell you though is SAVE is operating 70% of aircraft as of July. My bet is people are making shorter trips and are flying from the southern states or to the southern states (look at individual airport passenger numbers). SAVE is king in those areas. LUV is also in that league however going into this downturn they were sheltered from major selloff. So tremendous upside remains with SAVE.

Also for all we know more people may be flying one airline vs other airlines even if the overall passenger numbers look bleak. Once again the fact that SAVE already is operating at 70% means they may have seen a lot of demand on their routes (also as previously mentioned look at individual airport passenger numbers for southern states)

[ziaakbari]

long save jblu aal

[John Gilluly]

Lucky Bumblebee: to answer your question. Airline passenger data has plateaued (for the first time since ramping in April) at around 26-27% of 2019 traffic over the last 3 weeks.

Plateaued. Not gone down.

And this in the face of a parabolic-doubling of corona infections over the last 6 weeks from its previous April highs. So people are obviously taking the risk of travel.

I believe the only safe way to play SAVE for the summer is to add under $16, and hold for $25+ sometime in the Fall. There should be more upcoming chances (@~$15) as long as uncertainty reigns in this very choppy market. $15.50-$15.90 seems to be relatively solid support.

Here is the latest TSA traffic graphs through July 9:
drive.google.com/...
drive.google.com/...

[Stone Fox Capital]

@John Gilluly
Hard to say traffic has plateaued b/c we are now comparing the current week to holiday traffic from a 3-day weekend. Guessing traffic tops 800K next week.

[Lucky Bumblebee]

Wise play. Thank you for your input.

[John Gilluly]

I don't disagree. I was simply referring to the shape of the graph, and yes, it is difficult to compare 2019 with 2020, but the pause is there in the chart. If the TSA numbers drive further higher into the 800s, then that would be bullish indeed.

With all the "bad news" the recovery has been hit with over the last 3 weeks, SAVE @ $17.53 seems solid. Still, August has traditionally been one of the worst months for the market (July, one of the best, and the best of all the summer months), followed by September, and of course, the mother of all biggies, OCTOBER. But as we all know, October can cut both ways, just like March,

And to my mind, we still have not had the "summer rally" yet. SO ...if that is going to happen, it should begin today in preparation for earnings next week. My money is on NLY and WFC. Stone Fox knows this, but if you want a rally, you go for the garbage (AAL, UAL), not the filet mignon (LUV). SAVE is in a category-killer all its own.

If I was going away for three months but needed to stay in the market, I would hold what I had of SAVE here, and put in buy/limit orders for every 50 cents down from $17.00 to $13.00 (who knows, you might get lucky?), because when the airlines get their act together after the pandemic is over, I think SAVE is a $30 stock.

Have I mentioned this before? Any of you guys checked out PVAC (oil)? It trades just over a P/E of 1.4 and will likely beat on earnings and revenues for their next EPS. Their earnings estimates are for around $5/share for 2020.

They have some really nice hedges between $30 and $40 bbl. I spoke to IR for about 30 minutes last week, and he went through the hedges for me, explaining them. A lot of enthusiasm there. And they have over a billion dollars in reserves.

A poster on this board turned me on to PVAC about 6 weeks ago. The stock rallied from 99 cents in March to $19 in June, and is now trading in the $8s. Stock is so volatile my broker won't margin it, so I have it in my retirement account.

[Lucky Bumblebee]

Interesting activity in the options market regarding 17.5 calls for August :
finance.yahoo.com/...
Close to previous earnings report there was a lot of activity for 7.5 puts. The stock immediately spiked up once it hit ~= 7.25 a few days after earnings (I think that was that day minimum).

[Stone Fox Capital]

Huge jump in Wednesday traffic which is normally weak, but hard to analyze this week due to the July 4 holiday. Thu/Fri/Sun traffic has the potential to top 700K for record rebound levels considering 7/1 hit 627K.

7/1/2020 626,516, 24.6%
6/24/2020 494,826, 19.1%
6/17/2020 441,829, 17.3%
6/10/2020 386,969, 15.4%

[ziaakbari]

long aal save jblu

[Lucky Bumblebee]

All SAVE's planes are in the air and 80-90% load factor is expected for July. www.usatoday.com/...
Traffic numbers are still increasing.
Would be interesting to see what will happen next but I don't think it will go back to 10$.
My take is it will still go down a little and hover around 15$ for a while and then start to go up again as we get close to earnings which I think will be much better than expected for SAVE.
It appears that people are not afraid so much about corona anymore and note that Robin Hood got a taste of it and he will not want to miss out once it goes below 15$.

[Stone Fox Capital]

@Lucky Bumblebee
The only people afraid are the 2-5% of people on Twitter that want to control the rest of society. Oh, and NBA players. The virus isn't a threat to somewhat healthy people under 65 and at least 50% of society appears to be understanding this fact based on August demand.

[Wellington999]

Please notice the hundreds of stories of the people in their 30s-50s dying of this virus. And the number of cases in most of the country is currently soaring. Your misinformation campaign is idiotic. Also a new even more contagious strain has been identified.

[Stone Fox Capital]

@Wellington999
Hundreds? You are going to stop traveling b/c hundreds of people with pre-existing conditions are dying. You do realize this happens with the flu every year? More kids died this year of the flu than covid.

The only misinformation campaign is from those overhyping the virus.

[Joeyh72]

Spirit is one of the better airlines to have during this virus. My question is but why have it. It is definitely going lower. Not that it will not rebound in the future. The whole sector is going to be going way down in next few weeks. I never understood people saying well it’s 25 and it might go back to 10 but in five years it should be 50. No I will be a buyer again around 8-10. Depending on what I think the economy will do and who will win the presidency. One good thing spirit has over the rest is that they did not hedge their jet fuel. They are able to take advantage of cheap oil. Other airlines are not only losing money from overall operations but will be taking a huge derivative hit. Especially since they will not be using the fuel they hedged at. That is going to be another big expense that aal and the rest do not mention when they talk about their daily burn rate

[Stone Fox Capital]

@Joeyh72
No doubt, one should wait to buy $SAVE at $8-10, if such a drop was going to happen. No logic exists for this dip as passenger demand surges. $UAL is adding 25K flights in August alone.

Most airlines don't hedge fuel so we're only talking maybe $DAL.

[Wellington999]

They will cancel those flights as more and more states like New York refuse visitors from the states were the virus is raging.

[Stone Fox Capital]

@Wellington999
Nobody is being refused... jeez

[ventureCapital]

Buy when stocks are low...cant figure out why the bashers are bashing? Are yall wanting to buy when the price is high?? Its like the folks betting against oil's rise after March blues? lol, I am all in on SAVE. All in on OVV and by Nov. I will be all in on NCLH and HLT

[Gbbengals123]

Agreed bought some in the 16s and will DCA from here. Longterm I like SAVE

[Stone Fox Capital]

@ventureCapital
Interesting play on $OVV. Whats the play with this oil stock?

[ventureCapital]

@Stone Fox Capital $OVV was previously Encana based in Canada. They bought Newfield (US based) 2 years ago and decided to exit headquarter out of Canada. They re-branded to OVV and the exit of Canada prompted the Canadian funds to dump OVV. The reason to exit was to get into the much larger american market and to get exposure to passive funds. Unfortunately the timing of the re-domicile to US and Oil price crash with Canadian funds dumping crashed the stock.
Since then the stock has quadrupled. But still very cheap. This quarter they were included in Russel 2000 and 3000 indexes. Hopefully next quarter the get into S&P 600 and 400. There is still massive upside with this play because they are cash-flow positive at 35$ oil and they have really good hedges that will shield them the rest of the year unlike many peers.
seekingalpha.com/...
Once they get into these passive funds the demand will be high on this stock. I see oil resting at >48$ by end of year, and since most OPEC members need it to be >55$ to balance budget I see this price being realized mid next year.
Here is a good SEC filing that has all the information you need on OVV. I know the assets they have. They will thrive.
www.sec.gov/...

[Stop The Printer]

Uh, I don’t think $25 was just the start.

Glad I bought Puts!

[Stone Fox Capital]

@Big_cloud
The stock is up since the 26th. How are those Puts?

[Stone Fox Capital]

Traffic continues to grow with 6/24 passengers up 53K or 12% from last week. No real indication of a slowdown due to higher virus counts in the South.

6/24/2020 494,826, 19.1%
6/17/2020 441,829, 17.3%
6/10/2020 386,969, 15.4%
6/3/2020 304,436, 12.8%

[Stone Fox Capital]

Another rebound high despite the NY/NJ noise. 6/25 traffic reached 624K for 47K increase WoW to 23% of 2019 levels.

6/25/2020 623,624, 23.0%
6/18/2020 576,514, 21.1%
6/11/2020 502,209, 18.8%
6/4/2020 391,882, 14.9%

[Stop The Printer]

@Stone Fox Capital - This is really irresponsible to be trying to come up with a bull statement for Spirit when the economy is literally shut down right now. C’mon. Pick another sector that has a fighting chance. Airlines are done for.

[Wellington999]

The South? The southeast, the south central, Texas, the southwest, California? They just shut the bars down in Texas today and stopped serving alcohol in Florida bars (LOL) but seriously even Ted Cruz is begging the insane White House to keep testing centers open.The border with Canada will be closed until October at least. Sports will start with no fans maybe in August if the players agree and cases of athletes testing positive is rising every day.

[ziaakbari]

long safe j..........

[John Gilluly]

Notice on NYC quarantine:

"Cuomo said travelers coming from states with a high infection rate will be subject to the quarantine. The infection rate is based on the number of infections per 100,000 residents on a seven-day rolling average. People who don’t voluntarily quarantine for 14 days will be subject to fines and a mandatory quarantine. He said the fines will be $2,000 for the first violation, $5,000 for the second and up to $10,000 if they cause harm.

“As of today, the states that are above that level are Alabama, Arkansas, Arizona, Florida, North Carolina, South Carolina, Washington, Utah, Texas,” he said. “That’s as of today. The states themselves can change as the infection rate changes and we will update daily what states are above that infection rate.”

That is a lot of domestic air traffic, especially from Florida and Texas. If CA is added to this list, that will hamper a LOT of domestic travel for the summer. And how about the airlines whose hubs are in NYC and Houston?

A lot is happening today. All the red states that Mr. Trump encouraged to IGNORE the COVID-19 virus now have spiking levels of the disease. Does not look good for the incumbents in those states, nor for Mr. Trump.

The V shaped recovery that could have happened if people had just been more careful, will now be drawn out until a cure or vaccine or herd immunity is achieved. Big week for the markets.

[Stone Fox Capital]

@John Gilluly
but if you want to take a 2-week vacation to FL, why wouldn't you just willing quarantine when coming back. Or why wouldn't one just ignore the quarantine. It's not logical to justify this program b/c a kid going to a bar in IL is probably at far more risk than somebody visiting family in TX.

The case surge has a lot to do with more tests and tests of the younger crowd.

[John Gilluly]

It's the airports in those cities. Would you get on an airplane if you knew when you got back you would have to quarantine, and in the summer too? People would just opt to cancel, rather than deal with the hassle.

There is a huge amount of air traffic that flows through NYC and Houston. And if CA shuts down again? Forget it. And if the rate of infections keeps ramping like this, there could be more shutdowns. The American people were just not "into" taking precautions as they should have, with leadership by a feckless president who has ignored science in other areas as well.

Big sea changes happening here. Biden could sweep into office with a blue senate and house, which will mean a lot of fiscal changes for business. If the virus is omnipresent by the end of July - and there is no cure or vaccine or effective treatment - and there is no continuance of the generous unemployment insurance that has kept most of everyman-American afloat, there will be severe consequences in the economy.

The only way the recovery would have worked was if people had followed the guidelines. In a sense, we are back to the Sweden model, and all that sheltering-n-place turned out to be a waste of time because of lack of participation.

[John Gilluly]

There is a lot more here going on than meets the eye. Hotels that will now not open during the summer season, pent-up demand for vacations that can't happen (that is going to be really frustrating for voters who were working under the assumption that the curve would have been flattened by now, instead of reaching some of the greatest single-days ever!) Hawaii may close again, because of their bad experiences with outbreaks in the past.

[Stone Fox Capital]

Another massive jump in traffic for a Tuesday. 6/23 traffic was up 53K to 18.8% of 2019 levels. Passengers are now up nearly 7 percentage points in the course of June alone.

6/23/2020 471,421, 18.8%
6/16/2020 417,924, 16.9%
6/9/2020 338,382, 13.9%
6/2/2020 267,742, 11.9%

[John Gilluly]

Since the rally high at $26 on June 10-11, SAVE has retreated 31%, while there has been a 50% increase in airline passenger traffic. I would say the sudden jump in price up to $26 covered that increase in traffic, and we should revisit it.

BTW...KBH reports tomorrow. They have beaten for the last 6 quarters, and the previous one by 43%. There is only a 5.6% national supply, Incredible demand from Spring has been pushed forward, showing up in the June numbers. Builders are selling homes they haven't even built. Themes: builders in suburbs, high tech homes, office spaces at home instead of commuting to work, a yard for children to play in. Larger, more costly homes, yet bought at record-low interest rates.

[Truth_AndMovement]

Added to both SAVE and KBH today

[John Gilluly]

The market clobbered KBH in afterhours today, down -13.5% from the close. Hardly an uptick the entire session, and there was solid forward guidance too and increased demand in May/June.