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Top Picks 2020: Spirit Airlines (SAVE)
01/24/2020 5:00 am EST
Air Lease remains a perennially cheap stock despite an incredible management team and a history of steady growth. The stock remains the best positioned lessor with the newest fleet, the lowest overhead, the lowest cost of funds in the industry, and the best management team.
Meanwhile, Spirit Airlines is an ultra-low-cost carrier operating 600 daily flights to 75 destinations in 16 countries. The ultra-low-cost model has been popular in Europe for many years and seems to be gradually gaining favor in the U.S. as well.
Spirit is leaning into the opportunity. It ended 2019 with about 145 planes in operation, double the size of its fleet at the end of 2015. Its growth plans call for an additional 48 planes delivered over the next two years, approximately 15% growth per year.
At the end of the day, only half of revenue comes from base ticket fares, with the other half coming from upcharges and ancillary revenues. Even with the upcharges, the company claims that its all-in price remains about one-third lower than competitive carriers’ all-in prices.
Low price can be a difficult strategy. Executed well, however, it is a very reliable one. Spirit does not provide the most pleasant experience in the sky, but it has its loyal customers.
One of the factors that attracts us to Spirit is its young, standardized fleet of Airbus 32 aircraft. Owing to its fast growth, Spirit’s fleet is actually the youngest among major carriers.
This industry is no place to invest going into a recession, but an investor betting on continued, steady economic growth may find a lot to like here. The company’s growth story is simple—add more planes and more service routes. The pace of growth looks ambitious, but not wild.
Even if growth is slower than hoped for, the low valuation could rise, and stockholders could make good money, nonetheless. We don’t see many pockets of deep value in the market as 2020 rolls in, but Spirit Airlines does look like one.
We model 10% compound EPS growth starting from a base of $3.80, which could generate EPS of $6.12 in five years. That figure, combined with a high P/E of 17.1, generates a high price of $105.
For a low price, we apply a low P/E of 8.7 to 2014 GAAP EPS of $3.08 — the company’s lowest normalized EPS performance in the last five years. This yields a low price of $27. On that basis, the upside/downside ratio is 5.7 to 1.
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