Is Spirit Airlines Being Unfairly Punished?

After being bullish on airline stocks for over 1.5 years, I recently started recommending investors to book profits. With crude oil surging almost 100% from its multi-year low levels, it isn’t a surprise that most airline stocks have underperformed the market to a great extent this year.

While I have changed my stance on almost all the airline stocks that I was covering, I am still bullish on Spirit Airlines (SAVE). Given the weakness in the entire sector, Spirit Airlines has fallen in sympathy with other airline stocks. However, I think the Market has misunderstood Spirit Airlines and the stock will probably surge towards the $50 mark after the next earnings season.

Misunderstood

Falling unit revenue was the primary reason why airline stocks have been weak this year.
Spirit Airlines lost over 40% of its value last year primarily because its unit revenue was down in double-digits in the last quarter.

However, unlike other airlines, Spirit Airlines stands to benefit from a moderate rally in crude prices. Due to Spirit Airlines’ business model, it was easier for legacy carriers like American Airlines to compete against it on price when oil was trading around $30 per barrel. As a result, Spirit Airlines’ unit revenue and stock plummeted in 2015. However, given that oil prices have rallied strongly in the last few months and the outlook is also looking bright, oil will likely continue its upward trajectory.

Carriers will be forced to gradually increase their ticket prices. And as a result, Spirit Airlines will regain its competitive edge over its peers once again. Moreover, rising ticket prices will also help the unit revenue metric which has been governing the airline stocks movement in the last one year.

Hence, I think Spirit Airlines is misunderstood and undervalued. The carrier still has a lot of room to grow and the new CEO even pledged to improve customer satisfaction levels. With Spirit Airlines regaining its competitive advantage of offering extremely cheap tickets in comparison to peers, I think the stock will rise to above $50 in the coming weeks.

Conclusion

North of $50 signifies an almost 20% rise in Spirit Airlines stock. Hence, I think investors should accumulate the stock on recent weakness. I think the carrier’s business is misunderstood and the stock is undervalued given the tailwinds mentioned above. Thus, I think Spirit Airlines is a buy at current levels.
Published on Jun 16, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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