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Why Delta And Spirit Could Have At Least 50% Upside

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Why Delta And Spirit Could Have At Least 50% Upside
  • Buckingham Research analysts Daniel McKenzie and Scott Park reiterated Buy ratings on Spirit Airlines Incorporated (NASDAQ: SAVE) and Delta Air Lines, Inc. (NYSE: DAL) on Wednesday.
  • The experts issued a $75 price target on shares of Delta.
  • The target price for Spirit was set at $66.

In two separate reports issued Wednesday, analysts at Buckingham Research reiterated Buy ratings on shares of Spirit Airlines and Delta Air Lines. Let’s take a look at the main elements behind their bullish theses.

Delta Air Lines

After factoring in a 1 percent dividend yield, the experts issued a Buy rating and $75 price target on shares of Delta, implying an upside of roughly 55 percent from current valuations. The analysts decided to boost their 4Q15 EPS estimate by a nickel on a lower tax rate. They now expect earnings of $1.20 per share.

Going forward, a choppy revenue outlook for the first quarter, which is likely to be disappointing, suggests “choppy stock performance this winter,” according to the note.

The research note pointed out that Delta is still in the initial stages of a $6 billion return of capital program and, based on the firm’s revised outlook, “is generating enough FCF to retire ~30 percent of the shares outstanding over a three-year period (after dividends and cash taxes).”

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Shares are now trading at 7.1x Buckingham’s 2016 EPS estimate – equivalent to a 12 percent FCF yield. In addition, the company is “one notch away from an investment grade rating.” These factors make its risk/reward profile very attractive, even in a sluggish macro backdrop.

Spirit Airlines

On Tuesday, Spirit announced that new CEO and president, Robert Fornaro, would be running the company, and the news caught analysts at Buckingham by surprise, according to Wednesday’s report. The outgoing CEO, Ben Baldanza, was great at his job, and managed to communicate a difficult story well, the experts added.

Fornaro “is also a seasoned CEO well-known to most on the Street, who could potentially be more open to M&A and slowing growth should the carrier miss its ROIC target,” the report continued.

Shares of Spirit, which have recuperated 27 percent from their 52-week low, still remain down 50 percent from their 52-week high as revenue and earnings continued to disappoint following a crackdown by American Airlines Group Inc (NASDAQ: AAL).

Looking ahead, the management team is shifting its growth from American Airlines, with the latter’s overlap of Spirit’s network declining to 55 percent in the first quarter of 2016 (from 57 percent in the last quarter of 2015) “when looking at city pairs based on a metropolitan basis (vs an airport basis).”

Spirit’s competitive edge results from its ultra-low cost structure, which should widen relative to the industry over the next two to three years, “with M&A likely 2+ years out,” the experts commented.

Buckingham’s call on Spirit has clearly been challenged. Nonetheless, Southwest Airlines Co (NYSE: LUV), which “less profitable during its growth years (e.g. 10 percent - 18 percent operating margins vs SAVE's 18 percent pre-tax margins this year and next), routinely traded at 20x forward earnings.”

Spirit now trades at ~10x the firm’s 2016 EPS estimate, a bargain for those that can adopt a longer investment horizon, the note concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

Image Credit: Public Domain

Latest Ratings for SAVE

DateFirmActionFromTo
Jan 2021SusquehannaMaintainsNeutral
Dec 2020JP MorganDowngradesOverweightUnderweight
Dec 2020Deutsche bankDowngradesBuyHold

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