Imperial Capital Turns Bullish On Spirit Airlines: Here's Why

Shares of Spirit Airlines Incorporated SAVE have lost more than 25 percent over the past year. The airline's fourth-quarter results led an Imperial Capital analyst to conclude that Spirit shares are trading at a discount. 

The Analyst

Imperial Capital's Michael Derchin upgraded Spirit Airlines' stock rating from In-Line to Outperform with a price target boosted from $42 to $49.

The Thesis

Spirit Airlines' stock is trading at 5x the analyst's fiscal 2019 TEV/EBITDAR estimate, which is notably below the 6x to 9x range which typically assigned to low-cost and value airliners, Derchin said in a Wednesday note.

A more appropriate multiple for Spirit Airlines' stock would be 5.5x, Derchin said, which incorporates the following: 

The acceptance by Spirit pilots of a tentative agreement that was proposed Feb. 5 and will be voted on by the end of the month. The competitive situation with United Continental Holdings Inc UAL remaining "steady."

The following factors are driving upside to Spirit's earnings and valuation, the analyst said: 

• Spirit Airlines hit an inflection point in the fourth quarter of 2017 and ancillaries now represent 50 percent of total revenue.
• Improving operations results in cost and revenue benefits.
• The expectation that capacity growth will decelerate to a rate in the low-to-mid-teens in fiscal 2019.
• A merger between Spirit and privately owned Frontier Airlines in the near future would come as no suprise, Derchin said. A combination with the ultra low-cost carrier would generate network synergies and the ability to better compete against United Continental, he said. 

Price Action

Shares of Spirit Airlines were up 1.59 percent at $40.94 in the Tuesday morning trading session. 

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Photo courtesy of Spirit Airlines.