Spirit Airlines Has 70% Upside, Says Buckingham's McKenzie

• Spirit Airlines Incorporated SAVE shares are down 42 percent year-to-date, after trading above the $80 mark in February.
• Buckingham's Daniel McKenzie maintained a Buy rating on the company, while reducing the price target from $90 to $72.
• Spirit’s shares plunged 15 percent after the company indicates that prices in the markets that it serves are likely to remain low in the foreseeable future, McKenzie noted.

Spirit Airlines indicated that prices in its target markets are low, and the situation is unlikely to change “in the foreseeable future." Following this, the company’s shares plummeted 15 percent, although recovering 1.7 percent the next day.

“SAVE reports that as fuel prices fall, so does SAVE's pricing because the carrier "manages to margin" (not to RASM). That said, higher fuel prices will likely pinch margins, hence the higher risk to shares and the cut to our valuation multiple,” analyst Daniel McKenzie wrote.

Despite this, Spirit is the 3rd most profitable airline this year, McKenzie pointed out. It recorded pre-tax earnings growth of 28 percent, even after a 15 percent decline in RASM.

An “ultra-low” cost structure gives Spirit a competitive advantage, and this could widen relative to the industry over the next 4-5 years.

The company has raised its 3Q15 operating margin guidance from 22-25 percent to 27 percent, citing lower costs. Management also guided to a 4Q15 revenue outlook that implies sequential deterioration.

The EPS estimates for 2015 and 2016 have been reduced from $4.19 to $4.15 and from $5.00 to $4.60, respectively.

The company’s risk/reward “remains compelling over a longer, 6-12 month horizon,” McKenzie said. Despite the downward revision, the new price target still implies 70 percent upside.