Evercore Is Upgrading Spirit Airlines

Evercore upgraded Spirit Airlines Incorporated SAVE Thursday from Hold to Buy and maintained an $85 price target.

Analysts Duane Pfennigwerth and Jeffrey Eisenberg made the upgrade following a 9 percent sell-off in the stock and believed that a 14-15 percent decline in Q2 unit revenue guidance represented “the trough in y/y momentum.”

The company also had a “widening unit cost advantage” versus the industry and a “moderating capacity growth rate” for 2016, according to the analysts. Spirit also has a reasonable growth valuation at 13x 2016 EPS versus the ULCC high teens historical mean.

Spirit’s cost advantage was highlighted in the chart below. Spirit’s Q1 2015 total unit cost adjusted to 1,000 miles was 38 percent below large network legacy carriers and 22 percent below traditional low cost carriers, according to the firm’s analysis.

“We have been long-term believers in the ULCC model pioneered by Ryanair in Europe. We moved to the sidelines on Spirit last summer ahead of the company's accelerating capacity growth plan starting in 4Q14 given risk higher growth could trigger 1) an execution misstep and/ or 2) a potential change in competitive environment,” Pfennigwerth wrote.

The company’s execution issued had been addressed, however, recent revenue trends meant there was “now far greater competitive controversy in the stock,” according to Pfennigwerth.

“Over the long-run, Spirit's ultra-low cost position supports profitable growth. Further, given Spirit's manageable scale there are likely confidence/ RASM restoring network adjustments that can be made (let others fight for Dallas?) over time," Pfennigwerth concluded.

The firm’s 2015 EPS was lowered from $4.90 to $4.60 and estimated 2016 EPS was cut from $5.60 to $5.30. The $85 price target represented 18x/15x 2015/2016 EPS.

Spirit Airlines recently traded at $69.69, down 1.37 percent.