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Why Did Spirit Airlines’ Stock Fall after 1Q16 Earnings?

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Apr. 27 2016, Published 1:50 p.m. ET

Spirit Airlines beat 1Q16 estimates

Spirit Airlines (SAVE) announced its first quarter 2016 earnings on April 26, 2016. The company’s revenue grew by 9.1% year-over-year (or YoY) to $538.1 million, beating analysts’ consensus estimates of $536.2 million. Earnings per share (or EPS) also beat analysts’ estimates. SAVE reported an adjusted EPS of $1.01 against analyst estimates of $0.96.

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Stock declines

SAVE stock was down by ~4.3% at the end of the day to $47.43. Falling profits, Spirit’s expectations for unit revenue pressures, and continuation of price competition sent the stock into a decline. We’ll discuss these in detail in the rest of the series.

Year-to-date performance

In 2015, Spirit Airlines (SAVE) was the biggest loser among regional players, losing 48% in 2015. This was mainly on account of heavily declining utilization and yields, leading SAVE to lower margin guidance twice during the year. Other regional peers JetBlue Airways (JBLU), Allegiant Travel (ALGT), and Southwest Airlines (LUV) gained 45%, 16%, and 3%, respectively, in the year.

However, the trend reversed in 2016. Newly appointed CEO Robert Fornaro’s vision for the future, along with expectations of price stabilization had helped the stock rise. SAVE has gained 15% YTD as of April 26, 2016. LUV is the only other major airline to have gained 6.5% in the same period. Delta Air Lines (DAL) lost ~15%, the highest among peers, followed by United Continental (UAL), which lost 14.6%, American Airlines (AAL), which lost 14%, and Alaska (ALK), which lost 9%. JBLU lost 12% and ALGT lost 1% in the same period.

As a discretionary item, it makes sense to compare air travel to the consumer discretionary sector. The Consumer Discretionary SPDR ETF (XLY) rose by 1% YTD. The broader market tracked by the SPDR S&P 500 ETF (SPY) also gained 1.5% YTD.

Series overview

In this series, we’ll analyze SAVE’s performance for 1Q16. We’ll also discuss what factors are expected to drive SAVE’s growth in 2016 and discuss the key indicators investors should follow. We’ll wrap up the series with a discussion on the stock’s valuation multiple.

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