It's been a turbulent time for Spirit Airlines(NYSE: SAVE) investors. Shares have tanked 78% just this year versus an 11% gain in the S&P 500(as of May 29).
With this airline stock down so much, some investors might be seeing an opportunity to scoop up shares on the low, with the hope that outsize returns can be achieved over the long haul. Is Spirit worth buying right now?
Net losses and lots of debt
Shareholders were not happy when JetBlue called off its proposed merger with Spirit in March after a federal judge blocked the deal. The hope was that this transaction would create a more powerful low-cost airline in the U.S. Without a suitor, Spirit's financial woes are in the spotlight. As the stock price drop indicates, this is a struggling enterprise.
One main cause for concern is that Spirit isn't consistently profitable. For the first three months of 2024, the business reported an operating loss of $207 million. This was after it posted four straight fiscal years of operating losses. That's certainly not an encouraging sign.
Spirit's debt burden is perhaps the biggest problem. As of March 31, the company had $3.3 billion of long-term debt on the books compared to just $765 million of cash and cash equivalents. This introduces tremendous financial risk to the equation, especially since the company isn't posting positive earnings. It's worth mentioning that unless the situation improves or Spirit raises more capital, it won't be long until the business runs out of cash.
Spirit is also having a hard time growing revenue. Sales have fallen at least 5% on a year-over-year basis for three straight quarters, a streak that's still going.
"There has been a significant amount of industry capacity growth in the markets we serve and gaining deal traction and full loads in the non-peak periods has been difficult," Chief Commercial Officer Matt Klein said on the company's Q1 2024 earnings call. That excess capacity resulted in revenue per passenger flight segment, which is calculated as total revenue divided by the total number of passengers flown, dropping 8.1% year over year.
Management is focused on doing whatever it can to stabilize the business. This includes planned cost cuts to get to $100 million in savings. Plus, discussions are underway with bondholders that are worried Spirit will default on its debt obligations. A favorable solution here could provide much-needed breathing room for the business.
What's really discouraging is Spirit's performance compared to the rest of the industry. The "big four" U.S.-based airlines, which include Delta, Southwest, American, and United, all posted positive sales growth in their latest quarters. Moreover, they were all firmly profitable in 2023.
Looking ahead, Spirit's leadership team thinks revenue will drop 7.2% in the current quarter (at the midpoint). Investors can expect the poor financial performance to continue.
Cheap for a reason
With the shares down so much, I can understand why deep-value investors would be intrigued by Spirit. Expectations are incredibly low right now.
The stock trades at a price-to-sales ratio of just 0.076. In the past 10 years, shares have rarely sold at a lower valuation multiple. Even tiny improvements in Spirit's financial situation, like positive sales growth and a reduction in operating losses, should result in huge returns.
But this is still a very high-risk situation, with tons of near-term uncertainty. It's difficult to be optimistic about Spirit's prospects. No matter how cheap shares look, investors should not add the business to their portfolios.
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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.
