As the spread of the corona-virus has hampered the fortunes of the entire travel sector, smaller players have been hit disproportionately hard. Spirit Airlines(NYSE:SAVE) is down a harsh 65% below its 2020 high, having been down as much as 80%. As news started flowing in of airlines receiving government stimulus under the CARES Act, Spirit was missing from the care package talk for a while, which took a bad toll on the stock.
Late last week Spirit announced that it will receive a $330 million grant from the government which helped ease shareholder concerns, although it is to be noted that the grant was under the pre-condition that the carrier must maintain at-least the same amount of coverage of routes they serviced before the pandemic for emergency and medical purposes. The company has decided to run triangle flights to keep costs low and hold up the agreement. The company does not need to return 70% of the grant received and remaining is a low interest loan. That being said, the government will also receive equity warrants worth 3% of the grant.
On Friday Yahoo Finance reported that the analyst consensus on Spirit had turned negative with analysts expecting the airline to be unprofitable this year, with loss forecasts of $1.20 per share, compared to the previous forecast of a gain of $0.33 per share. Therefore the stock was downgraded to a sell, citing high leverage and low demand for air travel. (Yahoo Finance)
However, in downturns like these, short-term liquidity and cost of doing business matter more than leverage, and this is where Spirit shines.
As per the Spirit annual report, the company ended 2019 with $1.1 billion in cash, putting the company in a great liquidity position. The Spirit ultra-low-cost business model also put’s it at a competitive advantage in such sector and economic downturns as it is least likely to get hammered by bargain hunting flyers. In 2019, the company reported a CASM(cost per available seat mile) of 5.58, which is less half of legacy airlines. (Spirit Report)
Last year the company reported quarterly operating expenses of $845 million, over half of which will be covered by the payroll grant and by the drop in fuel prices, maintenance fees and runway fees. According to Seeking Alpha, the airline has cash burn of $2.5 million a day, which is very low, compared to other low cost airlines like JetBlue that are burning $10 million a day. At quarterly cash burn of approximately $225 million a quarter, the company has ample cash to last the year without the need for additional financing. (Seeking Alpha)
Even-though Spirit looks like the biggest loser in this pandemic induced frenzy, stock is trading at ridiculously cheap 2.4x P/E, and that combined with a super low-cost business model and good liquidity presents a risky but very high upside investment for opportunistic investors.