Spirit Airlines (SAVE -1.84%) has been in the spotlight this year. Despite lots of anticipation that a deal would close, JetBlue announced last month that it wasn't going to follow through with the acquisition of Spirit. Regulators blocked the transaction from happening, arguing that it would have negative impacts on consumers.
This airline stock continues to deal with excessive turbulence. Its shares are down 75% this year alone (as of April 12), and they trade at an eye-watering 95% discount to their December 2014 all-time high.
Should you take a chance and buy Spirit stock right now?
Poor financial situation
The entire airline industry was decimated in 2020 when the pandemic started. Spirit's revenue dropped 52.7% that year, but it bounced back the following year, up 78.5% in 2021. Sales have continued to trend in the right direction. Revenue increased 5.8% in 2023 to total $5.4 billion.
This clearly shows that Spirit doesn't necessarily have a problem seeing some demand gains, at least to the point that it results in higher revenue. For comparison's sake, American, Delta, Southwest, and United, considered the "big four" U.S. airlines, posted higher sales growth in 2023. But the positive is that Spirit didn't see a revenue drop.
But declining airfares for U.S.-based routes have been a major headwind for the business. Revenue per passenger-flight segment, which measures revenue divided by total number of passengers flown, declined 15% year over year in the fourth quarter. Management also highlighted an industrywide supply/demand imbalance, calling out higher capacity that has driven down fares.
Revenue is ready to start flying backward. Executives forecast Spirit to report a 6% sales dip (at the midpoint) in Q1 compared to the year-ago period.
There's a more pressing problem, however. Spirit has reported an operating loss in each of the past four years. It hasn't posted a positive number in this regard since pre-pandemic 2019.
Making matters worse, the company is saddled with a ridiculous amount of debt. As of Dec. 31, Spirit carried $3.4 billion of long-term debt compared to under $1 billion of cash and short-term investments.
This unfavorable situation adds a considerable amount of financial risk for investors, particularly since Spirit currently isn't profitable. Airlines are cyclical businesses, overly reliant on robust macroeconomic conditions for their success. If there's a recession, it's reasonable to worry that Spirit might run into trouble making its interest payments.
It's safe to say that the leadership team has their work cut out for them. It will be a delicate balancing act to control costs and get back to posting positive earnings, while at the same time trying to drive greater demand and reduce the debt burden.
Perhaps the bulls were hoping that had the merger closed, Spirit's financials would be on their path to showing significant improvements. This is a very desired outcome, as the business is struggling in this department.
A classic value trap
With the shares continuing their monumental decline, some risk-seeking investors might have Spirit on their radar. The thinking is that if the business can start to turn its troubled financial situation around, then the investment returns could be truly massive.
The stock has never been cheaper. It currently trades at a price-to-sales (P/S) ratio of 0.085. Spirit's P/S multiple has averaged 1.2 historically, so things are severely discounted today. Financial improvements would certainly expand that valuation ratio.
As good as the potential upside scenario sounds, I believe that outcome has an extremely low probability of happening. My perspective is simply based on the facts that I discussed above.
Consequently, I view Spirit Airlines as a classic value trap. The stock should be avoided at all costs.
