Spirit Airlines Initiated Bullish At Imperial Capital

Although Spirit Airlines Incorporated SAVE has a successful ultra-low cost model and among the highest pretax margins in the industry on a consistent basis, Imperial Capital’s Michael Derchin noted that the stock has declined more than 50 percent from its December 2014 highs.

Derchin initiated coverage on the company with an Outperform rating and price target of $51.

Increasing Competition

“The primary reason for the weakness in its shares, in our view, is investor concerns regarding the domestic competitive environment,” the analyst mentioned.

Over the last two years, the Big 3 airlines, along with Southwest Airlines Co LUV, have been matching Spirit Airlines’ ultra-low cost fares much more aggressive than in previous years.

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Derchin believes the increased competition is being fueled by lower jet fuel prices, which have led to increased marginal capacity.

In addition, “the sunset of the Wright Amendment, which increased long haul capacity from Dallas Love Field,” as well as “greater focus on attracting domestic leisure customers, as domestic and international business travel demand weakened,” have also fueled competition.

Concerns Overdone

However, the analyst believes concerns regarding Spirit Airlines’ competition position have been overdone, especially given the company’s superior pretax margins against the backdrop of increased competition.

“In fact, we believe SAVE’s recent competitive experience is not dissimilar to those faced by LUV and Ryanair Holdings plc (ADR) RYAAY during the early stages of their growth plans, which turned out to be tremendous buying opportunities at the time,” Derchin added.

Full ratings data available on Benzinga Pro.