What happened
In 2015, high-flying market darling Spirit Airlines (SAVE -3.07%) fell out of favor among investors. The stock plunged more than 60% from its all-time high around $85, finally bottoming out around $33 late last year.
Since then, shares of the budget airline have been recovering in fits and starts. That process continued in October, as Spirit Airlines stock rose 12.7%, according to data from S&P Global Market Intelligence.
Spirit Airlines stock performance. Data by YCharts.
So what
The bulk of Spirit's gains last month came after the company released a bullish investor update on Oct. 17. That update revealed that Spirit Airlines had outperformed its unit revenue guidance in Q3.
Total revenue per available seat mile (TRASM) fell 7% year over year last quarter, compared to management's initial expectation of a 9% decline. That was a huge improvement from Q2, when TRASM sank 14.3%.
Downward pressure on fares is finally relenting for Spirit Airlines. Image source: Spirit Airlines.
Investors got more good news later in the month. In conjunction with Spirit's Q3 earnings report, management forecast that TRASM will decline just 3%-4.5% year over year in Q4. This puts the company on track to return to unit revenue growth in early 2017, which is the first step toward resuming its long-term trend of steady double-digit revenue and earnings growth.
Now what
Spirit Airlines stock trades at a very modest valuation of less than 12 times earnings. That makes it look like a bargain, considering that Spirit has the potential to grow at a double-digit pace for many years to come.
For its earnings multiple to improve, Spirit needs to show that its profit margin is stabilizing. That almost certainly requires a return to unit revenue growth. If Spirit Airlines can get TRASM to start rising again in the next few quarters, the stock could continue to rally.
