Investors prefer the businesses that they own to provide a smooth journey for their portfolios. But Spirit Airlines(NYSE: SAVE) has done anything but. Since October 2019, shares have tanked 94%, while at the same time, the broader S&P 500 has produced a 111% total return.
There's a lot that investors need to know about this troubled airline stock, which is currently 97% off its peak from nearly a decade ago, before making an informed decision for your portfolio. Continue reading to learn more about Spirit Airlines.
Fasten your seatbelts
To say that 2024 has been a difficult year for this business would be putting it lightly. JetBlue was supposed to be Spirit's savior. A proposed merger between these two companies would have created a more powerful low-cost air carrier. But the deal was blocked in January. And since then, shares of Spirit have tanked a gut-wrenching 71%.
If the proposed merger had been approved, the new entity could very well have been on a path of improved finances, something Spirit desperately needs right now.
In fact, Spirit's red flags are hard to ignore. Sales trends are troubling, as overcapacity in the airline industry has put a damper on ticket prices. Moreover, Spirit has lowered pricing on non-ticket services, like seat selection and baggage. These unfavorable variables helped drive an 8.5% year-over-year revenue dip through the first six months of this year.
Investors don't really have much to be optimistic about here. According to Wall Street consensus analyst estimates, Spirit's sales are expected to be down 7.7% for all of 2024, before rising just 1.8% in 2025. This is a discouraging near-term outlook.
The top-line decline wouldn't be that troubling if Spirit were generating positive earnings. However, this hasn't been the case for a long time. In the first two quarters of this year, Spirit posted a total operating loss of $360 million. The business hasn't reported positive operating income for a full year since 2019. Spirit is dealing with headwinds from higher expenses for labor, landing fees, and aircraft rent. Reduced costs for fuel weren't enough to boost the bottom line.
What's more alarming is that Spirit's disappointing financial performance doesn't match what's happening in the airline industry as a whole. The big four airlines, Delta Air Lines, Southwest Airlines, United Airlines, and American Airlines, saw their sales rise in their most recent quarters. And they all registered positive operating income in that period.
It also should surprise no one that Spirit's balance sheet leaves much to be desired. The business carries a whopping $7 billion of debt and operating lease liabilities. There's only $725 million of cash and cash equivalents to offset that burden. Perhaps one key reason for the stock's fall is due to investor concerns that Spirit might be on the verge of bankruptcy.
Is Spirit too cheap to ignore?
Spirit shares trade at a dirt cheap valuation right now. Investors can scoop up the stock at a price-to-sales (P/S) ratio of 0.05. Throughout its entire history as a public company, shares have never had this low of a valuation. The business has undoubtedly fallen out of favor with the investment community in spectacular fashion.
But all else equal, a cheap valuation multiple is more desirable than an expensive one. And Spirit's low P/S ratio could draw in deep-value investors who have a greater appetite for risk. Even small improvements with Spirit's financials, like stabilizing revenue or declining losses, could send the stock sharply higher.
However, it's best to heed the words of one of the best investors ever. "Turnarounds seldom turn," Warren Buffett is credited with saying. It's hard to have any sort of confidence as it pertains to Spirit's prospects. Investors should steer clear of the stock.
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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.
