Spirit Airlines lifts off on high margins and future growth plans

Analysts recommend buying stock of Miramar, Fla.-based Spirit Airlines based on the company’s high margins and growth strategy. Photo courtesy of Adam Fagen.

Spirit Airlines Inc.’s stock has skyrocketed almost 40 percent this year so far as investors flock to its high margins and future growth strategy.

The Miramar, Fla.-based company attracts customers with its low fares and then charges them for extras like carry-on bags or a bottle of water, services that are mostly free on other airlines.

Though it was ranked America’s least-favorite airline by a Consumer Reports survey in July, the no-frills strategy has proven financially successful, allowing the airline to routinely beat profit expectations.

“Spirit is a unique airline which has double-digit pre-tax margins, nearly unheard of in the industry,” said Helane Becker, analyst at Cowen and Company, in an April 29 note.

Last year, the airline reported an operating margin of 17 percent, the second highest of nearly 70 carriers studied by Airline Weekly, a Fort Lauderdale, Fla.-based firm. Managing Partner Seth Kaplan said the carrier’s ultra low-fare, low-frills model enables it to beat many other larger airlines.

“It’s not the only way to make money,” Kaplan said, “but certainly disproportionately represented at the top of that list are these ultra low-cost carriers.”

Travelers are becoming increasingly price sensitive, as domestic rates have risen 19 percent over the past two years because of airline consolidations, according to a study by Frommer’s Guidebooks. Bad news for fliers, good news for Spirit.

“Right now, particularly for domestic travel in the U.S., fares are very high so it’s a great environment for Spirit,” Kaplan said. “They can charge fares that aren’t all that low, but are still a good deal relative to the other airlines.”

But the environment isn’t the only reason analysts recommend buying Spirit stock. The company recently announced it will begin purchasing rather than leasing its planes, which Becker said will increase Spirit’s earnings per share.

“We believe that owning the aircraft outright is actually more accretive to the company than leasing,” said Becker, who has an outperform rating and a $64 target price for the shares, in the note. “We believe the company will look to fund more and more of their aircraft deliveries given the growing cash balance.”

Savanthi Syth, analyst at St. Petersburg, Fla.-based firm Raymond James & Associates, agreed that Spirit’s growth doesn’t show signs of slowing.

“Spirit has carved out a niche, and we believe it will continue to have good growth and profit margins over the next few years,” said Syth, who has a $68 target price. “As far as we can tell, the outlook remains favorable for Spirit.”

In the first quarter ended March 31, the airline earned $438 million, or 51 cents per diluted share, up 18 percent from $370.4 million in the same quarter the year before. The results disappointed investors as severe winter weather hurt the company during January and February, but Spirit is expected to rebound during the seasonally strong summer months.

Spirit’s trailing price-to-earnings ratio, at 24.87, is comparable to its nearest competitor, Allegiant Travel Co., with a p/e of 24.67, but higher than the Standard & Poor’s 500 index p/e of 19.47.

Over the past year, Spirit traded as high as $63.89 on March 25 and as low as $29.20 last June 26. Shares fell 68 cents in Monday trading to close at $62.41.

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