Hurricanes, Energy Prices Prompt Deutsche Bank To Cut Price Targets On Spirit, Delta

Spirit Airlines Incorporated SAVE value proposition may be in jeopardy. 

In the face of higher energy prices, geopolitical risks, natural disasters and increasing competition, the low cost carrier may be facing some revenue pressure in the near term.

Spirit management is expecting to take a 1 PP hit from Hurricane Harvey and a 4 PP reduction against prior guidance attributable to “broadening aggressive pricing activity."

Deutsche Bank analyst Michael Linenberg has lowered September quarter earnings estimates from $1.20 to 90 cents per share. The analyst also lowered the full year estimate on the ultra-low cost carrier from $3.85 to $3.00.

Spirit benefits from a nearly deceptive pricing model that it has come under fire for. Other carriers getting competitive in pricing while delivering a superior product could spell doom for the "most hated airline" in the US.

Deutsche Bank lowered its 12-month price target on Spirit from $54 to $42.

“We are using a 14 P/E multiple to derive our PT,” said Linenberg. “This is below the low end of the 15x-20x P/E range typical for profitable, growth-oriented, high return ultra-low cost carriers/low cost carriers.”

Fuel price volatility remains a threat to any airline, but Spirit appears to be more price sensitive to fluctuations. With Hurricane Harvey devastating one of the largest fuel refinery regions in the country, and Hurricane Irma on the way, energy prices are on their way up.

Every 10 percent increase in fuel, impacts Spirit’s 2017E EPS by 55 cents, according to Deutsche Bank's model. By the same move, Delta’s EPS is impacted by 50 cents. The bank lowered its estimates and price target on Delta Air Lines, Inc. DAL from $62 to $59.