Overview: Lone Pine Capital's new position in Spirit Airlines (Part 7 of 7)
Spirit’s attractive valuation
Lone Pine Capital disclosed a brand new position in Spirit Airlines (SAVE) through a 13G filing this week. According to the filing, the fund owns a 6% stake in the airline company with 4,373,632 shares.
A comparison of Spirit with its peers in the U.S. carrier space shows that the company has robust valuations. We discussed earlier in this series that the company’s operating margins are higher than its peers, namely ultra low-cost carrier (or ULCC) Allegiant (ALGT), major carriers American Airlines (AAL), Delta Airlines (or DAL), and United Continental (UAL), and budget carriers such as Southwest (LUV) and JetBlue (or JBLU). With the exception of Delta, Spirit’s profit margins are also higher than its peers. Its forward price-to-earnings (or PE) multiple and enterprise value (or EV) to earnings before interest, taxes, depreciation, and amortization (or EBITDA) are above the peer average. At the end of 1Q14, Spirit said it had $544 million in unrestricted cash and cash equivalents, no debt on its balance sheet, and total shareholders’ equity of $809.4 million.
In terms of competitive threats from other upcoming ULCCs such as Frontier, Spirit believes that it has a robust cost structure and untapped growth opportunities. The company compared itself to Ryanair. It expects to account for less than 5% of the traffic in the U.S. by the end of the decade. Despite increasing cost pressures that could impact margins in the near term, Spirit has a strong financial performance. It’s expected to benefit from the general bullish outlook for the sector. It said in a March presentation that it’s targeting average annual capacity growth of 15%–20% over the next several years while delivering operating margins in line with its three year historical range of 15%–17%.
A forecast by the Federal Aviation Administration (or FAA) said, “Assuming energy prices remain relatively stable, U.S. carrier profitability should increase as an improving economy in its fifth year of recovery leads to strengthening demand, which coupled with continuing capacity discipline results in higher fares—and increased ancillary revenues.” Since there are no airline-specific exchange-traded funds (or ETFs) currently, investors can also gain exposure to the space through the iShares Dow Jones Transportation Average ETF (or IYT) and the SPDR S&P Transportation ETF (or XTN).
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