An Update on My Favorite Airline Stock

Spirit Airlines (SAVE), which I touted as my best long idea for 2016, is up almost 23% year to date. While I still believe in the company’s long term prospects and think investors can still hold the stock for a long time, I think investors can consider booking partial profit due to the increasing concerns regarding the capacity growth in the airline sector.

The positives

Despite the 20%+ jump this year, Spirit Airlines is trading a lot lower than its 52-week highs. The primary reason for the decline has been competitive stance from carriers like American Airlines (AAL). Due to cheaper crude, American Airlines has been able to compete against Spirit on ticket pricing, which in turn has led to a steep decline in Spirit’s decline in unit revenue.

I knew the price competition would end badly for American Airlines, which is why I turned bearish on the stock a few months ago.
Due to Spirit’s cheaper cost structure, I was sure that the company would be able to fight off competition from American.

Now with oil prices moving higher, I think Spirit stands to benefit from it the most. Increasing oil prices will lead to higher ticket prices and Spirit will be able to regain its competitive edge over rivals like American and Southwest.

The carrier’s unit revenue should gradually inch higher in the coming months and investors’ reaction to it will be positive. Hence, I think investors with long-term investment horizon can still continue holding Spirit Airlines as I think the stock is trading about 15% lower than its fair value.

Capacity concerns

To capitalize on the growing demand, airlines have been growing capacity at a rapid pace. Overcapacity concerns can have a negative impact on the entire sector and can hurt Spirit Airlines, which is why I think investors can book partial profits at this point.

However, there was a similar concern in July of last year, but airline stocks moved higher as the positives outweighed the negatives.

Conclusion

Despite the massive up surge, Spirit Airlines is trading at a discounted valuation. Hence, I think investors can continue holding the stock. However, investors looking to start a position can look for a better entry point as I believe the overcapacity concerns can push the stock’s valuation lower in the coming days.
Published on Mar 22, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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