Spirit Airlines(NYSE: SAVE) has experienced nothing but turbulence lately. The company is dealing with the fallout of a failed merger attempt with JetBlue and has struggled to get on better financial footing.
It's no wonder shares have gotten crushed. They trade at a gut-wrenching 97% below their all-time high, set in December 2014.
Perhaps a successful turnaround is on the horizon. Should investors buy this struggling airline stock?
Financially unclear skies
After the proposed merger with JetBlue was blocked by a federal judge earlier this year, it seemed like shareholders were disappointed. The objective of the deal was to create a more powerful domestic budget airline. Moreover, it was somewhat of a lifeline for Spirit. Now, the company's problems are hard to ignore.
Spirit is a money-losing enterprise. During the four-year stretch from the start of 2020 through the end of 2023, the company posted a cumulative operating loss of nearly $1.7 billion, and there wasn't a single year of positive operating profit. Spirit continued this disappointing streak through the first quarter of 2024, with a troubling operating loss of $207 million.
Financial leverage is also a cause for concern. As of March 31, the business had $3.3 billion of debt. This is almost four times larger than the $879 million in cash, cash equivalents, and short-term investment securities, and is the perfect recipe for financial disaster. Ongoing losses paired with sizable debt should worry investors about the possibility of Spirit running out of cash, leading to potential bankruptcy.
For what it's worth, executives are trying to fix the situation. Spirit is in the midst of finding $100 million in expense reductions while employing other actions to boost liquidity. In an effort to get ahead of the curve, management is in discussions with bondholders about notes that are coming due next year and in 2026.
As if the alarming income statement and balance sheet weren't creating enough of a problem for the business, it's worth mentioning that Spirit is also struggling to grow. It reported a 6.2% year-over-year revenue dip in the first quarter of 2024, marking the third straight quarter of decline.
This situation isn't going to improve anytime soon. Management believes revenue will come in under $1.3 billion in Q2, representing an 11% yearly drop. That guidance is lower than the company provided earlier in the year, not an encouraging sign. The leadership team has previously called out excess capacity in the industry, particularly from airlines focused on serving leisure travel demand.
These challenges appear to be specific to Spirit. The "Big Four" domestic carriers, a group that includes Delta, United, Southwest, and American, all reported sales growth in the first three months of this year.
Is Spirit Airlines stock a value trap?
As of this writing, Spirit stock trades at about $2.80 per share, and the company carries a market cap of $309 million. There's an extremely high level of pessimism surrounding the airline, which I believe is warranted.
However, I can understand why some investors would be interested in the stock. It trades at a price-to-sales ratio of 0.06. That valuation is the lowest in the company's public history.
The hope for these risk-seeking investors is that Spirit can successfully orchestrate a turnaround, whether that's by increasing sales, minimizing operating losses, or managing its debt load (or all three), sooner rather than later. Even small improvements could change the narrative surrounding the stock.
I view this as a high-risk investment opportunity. There's a very real possibility that Spirit will teeter on the brink of bankruptcy within the next couple of years. Investors are better off avoiding this stock altogether.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.
