Spirit Airlines (NYSE :SAVE) is one of the United States’ largest ultra low-cost carriers. The company was the seventh largest operator in the country with a 4.2% domestic market share. The airline has established itself as a major force in the sector after growing nearly 2.5x in the past decade on the back of explosive growth in the ultra-low cost aviation sector.
In 2020, however no travel or entertainment company has been spared by the wrath of the coronavirus that contaminated people and businesses globally. As the fear of virus transmission took over, consumer aviation volumes tanked 95% over the last 2 months.
Spirit Airlines have thus been having a very tough time at the stock market. The stock closed yesterday almost 77% down YTD yesterday due to general underperformance of the sector and the company’s underperformance at Q1 earnings. Aviation sector stocks also took a beating after Warren Buffett’s Berkshire Hathaway, one the largest holding companies in the world announced their exit from the sector and Buffett himself made critical comments on the outlook of the sector.
At the company’s earnings call, management informed investors that consumer behavior has changed significantly post-coronavirus as ultra-cheap fares of $19 offered in March and April too were unable to boost ticket sales (Skift). Prior to earnings, Spirit was positioned to be one of the best bets in aviation due to it’s strong liquidity, resilient business model and low cash burn.
The company has $2.6 billion of liquidity, a staggeringly low cash burn of just $4 million a day and operates in the ultra low-cost segment, which is expected to be the first to rebound as demand returns (Seeking Alpha). Everything was looking great due to early signs of travel demand recovering starting to show as passenger volumes nearly doubled this week compared to April.
Market analysts however, have seemed to have had a change of heart on the prospects of the stock (The Street). On Wednesday, the stock was downgraded by Raymond James analyst Savithri Syth citing, “slightly slower earnings recovery at Spirit relative to other domestic peers due to its role as a ‘spill’ airline and believe, in contrast to some investors, that Spirit will be able to maintain its cost advantage even if it has to pair back operations” (MarketWatch).
Following the Raymond James report, a flurry of analysts downgraded Spirit after lowering revenue and EPS estimates for 2020. The new projections are revenues of just $1.9 billion and a loss per share of 6.66 dollars compared to prior projections of $2.4 billion in revenues and loss per share of $2.88. (Yahoo Finance)
The stock closed 13.2% down on Wednesday at $8.2 and a P/E multiple of 2.24.