Spirit Airlines: The One Airline Hedge Funds Can Fly With

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(This write-up is an edited and greatly-abbreviated pitch from the SumZero community.)

Spirit Airlines (NASDAQ: SAVE)
Recommended Action: LONG
Current Price: $18.22 Target Price: $30.00
Source: Hedge Fund. Minneapolis, MN.

Quick Pitch:

Spirit Airlines is an ultra low cost airline with the lowest costs and best margins in the U.S. airline industry. The company provides extremely low priced flights to a combination of vacation destinations and secondary markets and between selected major cities.

Despite cramped flights due to more seats per plane and endless complaints about service, Spirit’s flights are full and the airline is profitable. Think of them as something like the dollar store of airlines.

Using 6.5 EV/EBITDAR, which is the valuation of direct peer Alllegiant (NASDAQ: ALGT), and my 2012/2013 EBITDAR estimates, I believe Spirit stock offers investors 32% and 58% upside, respectively, over the next two years driven by continued execution and plane deliveries that will increase the size of their fleet by 19% in 2012 and 16% in 2013.

Peek into the Thesis:

According to a Feb. 2 company presentation, Spirit’s breakeven fare per passenger was $62.96 This compares to nearly $189 for American Airlines. Cost per available seat mile (CASM) is much lower, too. See table below:                

<table> <tbody> <tr> <td>Airline</td> <td>Breakeven Fare</td> <td>CASM (cents)</td> </tr> <tr> <td>American</td> <td>$189</td> <td>16.14</td> </tr> <tr> <td><strong>Delta</strong> <span class="ticker" data-id="210158">(NYSE: <a href="http://caps.fool.com/Ticker/DAL.aspx">DAL</a>)</span></td> <td>$166</td> <td>14.89</td> </tr> <tr> <td><strong>JetBlue</strong> <span class="ticker" data-id="204130">(NASDAQ: <a href="http://caps.fool.com/Ticker/JBLU.aspx">JBLU</a>)</span></td> <td>$133</td> <td>12.13</td> </tr> <tr> <td><strong>Southwest</strong> <span class="ticker" data-id="204370">(NYSE: <a href="http://caps.fool.com/Ticker/LUV.aspx">LUV</a>)</span></td> <td>$97</td> <td>10.43</td> </tr> <tr> <td>Spirit</td> <td>$63</td> <td>9.73</td> </tr> </tbody> </table>

Spirit deploys a number of strategies to maintain these low costs, including:

1. Fitting planes with a high density seating configuration. Spirit configures their A320 with 178 seats compared with 150 seats over at JetBlue.
2. Flying more fuel efficient airplanes, specifically the A319 and A320.
3. Maintaining high average daily aircraft utilization. Spirit average utilization is 12.8 hrs/day compared to 11.7 at JetBlue and 10.9 at Southwest. Thus, they turn aircraft faster.

Brief Conclusion:

Spirit is a 2011 IPO so it's new to the Street and is relatively unknown. The company presented at a conference a couple days ago and the stock immediately began to move. I think as the Street finds the story it is reasonable to believe it will be valued at a multiple similar to its best comp Allegiant.

SumZero (www.sumzero.com) is content created by hedge fund professionals for hedge fund professionals. Click here to join SumZero's free Weekly Dispatch or follow us on Twitter @SumZero.

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