This Stock Can Double in Five YearsSAVE) is the next Southwest Airlines Co (LUV). That could result in major profits for long-term investors.
Although Spirit Airlines’ performance has been very underwhelming over the last two years (with the stock losing considerable value), the company’s long-term future still looks bright. I believe the stock can easily double in the next five years.
Here is why I'm a believerThe airline industry has always been very competitive and cyclical.
With so many carriers yielding terrific returns over the last few years, investors may be worried about the upturn coming to an end.
While there is no accurate way to predict the peak of a cyclical industry, investors should be cautious given the recent rise in airline stocks.
Cyclical downturns usually lead to severe troubles and even bankruptcies.
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Given the highly competitive nature of the aviation industry, the only way of surviving over the long-run is by reducing costs. Southwest survived the downturn in the late 20th century by being cost-effective and frugal. Many of its rivals went bankrupt.
Today, Spirit Airlines has the lowest cost per average seat mile, or CASM, among its peers. Consequently, it also has the highest operating profit margins.
Moreover, Spirit Airlines generates a hefty portion of its revenue from add-on sales, which protects it from the seasonal nature of the aviation industry.
Given that Spirit Airlines’ ticket costs are also relatively cheap, the company is well-positioned to thrive in a cyclical downturn. In addition, the carrier only commands a market share of roughly 1%, giving it plenty of room to grow.
Addition by subtractionThe company’s management recently claimed that it will cut back on its optimistic growth plan and focus more on customer satisfaction, which in my opinion is a great move. Spirit Airlines is the most hated airline in the U.S. and the company needs to change its image before it takes on the legacy carriers more efficiently.
Growing at a moderate pace will allow Spirit Airlines to focus on its operations more effectively, which is what the carrier needs at this point. Spirit Airlines already has a robust and proven business model that leads to record margins. Thus, expanding into other markets won’t be a problem for the carrier as long as it continues to improve its customer satisfaction performance.
A mini-Southwest in the makingSpirit Airlines has a lot of room to run, and although the stock has been a laggard over the last few quarters, I think the upside potential for long-term investors is huge. Given Spirit Airlines’ robust business model and high margins, I expect the stock to outperform its peers in the foreseeable future, irrespective of the strength of the overall industry.
I think investors who have an investing horizon of five years or more should strongly consider adding Spirit Airlines to their portfolios.
Disclosure: No position
Published on Oct 13, 2016By Ayush Singh