The airline industry’s inherent challenges – significant initial investments, intense price competition, and the threat of economic downturns, have pushed several airlines toward bankruptcy. The current situation for Spirit Airlines (NYSE:SAVE) underlies the intensity of these challenges. With a failed merger, the impending grounding of its aircraft, the necessity of debt refinancing, and a daunting history of an average annual net loss of $475 million over the last four years, investing in SAVE stock at this point is a highly speculative move.
Low-Cost Air Fares
Spirit is the biggest ultra-low-cost carrier in the US. The company is among the pioneers of the business model of offering incredibly cheap tickets while charging for all services, from bag checks to seat picks, which has proven successful in disrupting the industry.
However, despite amassing vast sums through baggage fees, the airline has struggled to achieve profitability. High costs associated with fuel, aircraft rent, and landing fees have significantly impacted Spirit’s balance sheet, resulting in a $495 million operating loss last year.
Adding to these challenges, Spirit is currently facing a situation where a considerable portion of its Airbus SA fleet is set to be grounded due to mechanical issues. This will see an average of 40 of Spirit’s 205 planes immobilized.
In the News
In an unsurprising turn of events, JetBlue (NASDAQ:JBLU) and Spirit decided to call off their $3.8 billion merger earlier this week. This decision follows a federal court’s blocking of the deal due to antitrust apprehensions, first raised by the Justice Department last March.
This has led market observers to question Spirit’s future, as the company is in a precarious financial position. Creditors of the company’s $3 billion debt, of which $1.3 billion is due by 2025, are already lining up to protect their claims in the event of bankruptcy.
Equity investors share their skepticism as Spirit’s shares plummeted over 12% following the announcement of the deal’s termination.
Where the Stock Stands Now
SAVE stock has been trending down, shedding 69.3% over the past year. It trades towards the lower end of its 52-week range of $4.04-$19.69 and well below the 20-day and 50-day moving averages of $6.32 and $8.18, respectively, demonstrating ongoing negative price momentum.
However, from a valuation perspective, the stock looks undervalued relative to the peer group. The P/S of 0.1x is well below sector (Industrials) and industry (Airlines) averages of 1.3x and 0.5x, respectively.
Despite its potential undervaluation, given the industry dynamics and the company’s current financial position, investors are right to view the stock with suspicion as a likely value trap.
Is SAVE a Good Buy?
Analysts covering Spirit Airlines stock had mostly been neutral-to-bearish before the failed merger. However, in a recent research note, TD Cowen analyst Helane Becker suggested the JetBlue-Spirit split puts the airline in a position to seek another buyer or likely face a Chapter 11 filing followed by a liquidation.
SAVE is currently listed as a Hold based on one Buy, four Holds, and three Sell ratings, with a 12-month average price target of $7.50. However, those ratings and price targets were assigned before the failed merger, so we’ll likely see downward revisions across the board.
Until then, consider the forecast for the stock “cloudy with a strong chance of storms.”
An Uncertain Path
Spirit’s stock is on a downward spiral, having lost 68% of its value year-to-date. Despite trading below industry averages on relative metrics, investors should eye the apparent undervalue of stock with suspicion due to the uncertain business environment.
Spirit’s path appears clouded at best, with the doom of a likely bankruptcy looming large. Investing in Spirit at this point feels akin to walking into a lightning storm while waving a golf club around – unpredictable, risky, and fraught with danger.
