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What’s Priced In to SAVE’ Stock ahead of Its 3Q16 Earnings?

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Nov. 20 2020, Updated 12:32 p.m. ET

Spirit Airlines’ valuation

Currently, Spirit Airlines (SAVE) is valued at 7.2x its forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio. This is higher than its average valuation of 6.6x since February 2012. Spirit Airlines’ valuation is also higher than the industry median valuation of 5.1x.

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Peer comparison

On October 14, 2016, United Continental (UAL) was trading at 4.5x, Delta Air Lines (DAL) at 4.5x, American Airlines (AAL) at 6.7x, Alaska Air Group (ALK) at 5.6x, Southwest Airlines (LUV) at 5.1x, JetBlue Airways (JBLU) at 3.8x, and Allegiant Air (ALGT) at 6.7x.

The market is expecting DAL to record EBITDA growth of 8.2% in the next year. AAL’s EBITDA is expected to fall 5%, UAL’s is expected to fall 8%, ALK’s is expected to rise 6%, LUV’s is expected to rise 1%, JBLU’s is expected to rise 8%, SAVE’s is expected to fall 3%, and ALGT’s is expected to rise 1%.

Our analysis

Spirit Airlines’ unit revenues have been on a falling trend since 3Q14. In fact, in the last two years, Spirit Airlines has seen one of the worst unit revenue falls in the industry. Aggressive capacity expansion has also led to falling utilization since 2014, when most airlines’ utilizations were improving.

SAVE’s valuation has followed suit. As can be seen in the chart above, the company’s valuation was above the industry median at the start of 2014. Since then, it’s been falling steadily.

In the short term, SAVE’s ability to improve its utilization and yields, as promised by its new management, will impact its valuation multiples. In the long term, factors such as overcapacity in the industry, substantial fuel price rises and the airline’s ability to pass them on, and travel demand will play important roles in determining its valuation.

Investors should keep an eye on the above-mentioned factors by following Market Realist’s industry insights. Investors can take exposure to Spirit by investing in the First Trust Mid Cap Value AlphaDEX ETF (FNK), which has 0.8% of its holdings in Spirit.

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