Yahoo Finance Spirit Airlines’ Valuation: What Is Priced In?
Spirit Airlines' 1Q16 Earnings: The Wind beneath Its Wings?
Current valuation
As of April 15, 2016, Spirit Airlines (SAVE) was valued at 7x its forward EV-to-EBITDA ratio. This is higher than SAVE’s average valuation of 6.6x since February 2012. It is also higher than the industry median valuation of ~4.9x.
Peer comparisons
Analysts are expecting Spirit Airlines’ EBITDA to grow by only 4% in the next four quarters, which is substantially below all its peers. The expected growth in EBITDA among its peers follow:
Alaska Air Group (ALK): 13%
Allegiant Travel (ALGT): 5%
JetBlue Airways (JBLU): 21%
Southwest Airlines (LUV): 10%
In 2016, the EBITDAs of Spirit Airlines’ legacy peers Delta Air Lines (DAL), American Airlines (AAL), and United Continental (UAL) are expected to grow by ~24%, 9%, and 5%, respectively.
Investors can gain exposure to airline stocks by investing in the iShares Transportation Average ETF (IYT), which invests ~24% of its portfolio in airlines.
Our analysis
As can be seen from the chart above, Spirit Airlines’ (SAVE) valuation has been above the industry median since the start of 2014. However, its valuation has declined steadily since then. Spirit Airlines has enjoyed a historical premium of more than 30% compared to its peers. This has narrowed to only 9%.
The reasons for Spirit Airlines’ premium to its peers include its industry-leading growth, high traffic growth, high margins, and low leverage.
However, SAVE’s growth seems to have come at a cost. It has seen one of the fastest declines in yields during 2015. Its aggressive capacity expansion also led to declining utilization since 2014, when most airlines’ utilization numbers improved.
In the short term, Spirit Airlines’ ability to improve its utilization and yields, as promised by its management, is also expected to impact its valuation multiples.
In the long term, factors like overcapacity in the industry, a substantial rise in fuel prices, the airline’s ability to pass these costs on to its passengers, and travel demand will play an important role
Investors should watch for those signs by following our updates on the airline industry.
Browse this series on Market Realist:
