Why Spirit Airlines Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Spirit Airlines (Nasdaq: SAVE  ) fell as much as 17%, after the airline cut back guidance on revenue per available seat mile (RASM), a key metric in the industry, in its August traffic report.

So what: Spirit said that third quarter RASM would be down 2.5% to 4.5% for the third quarter, blaming the cut on the effects of Hurricane Isaac, as well as a federal excise tax holiday, which artificially inflated revenue in Q3 2011. Without these unusual items, CEO Ben Baldanza said, "RASM would have been up year-over-year."

The Wall Street brokerages didn’t seem to buy the explanation, as Raymond James downgraded the stock to "market perform," and Dahlman Rose cut its price target.

Now what: Despite this setback, Spirit is still growing strongly, with an increase of 19% in Revenue Passenger Miles in August, and 17% year to date. Analysts are also expecting a 28% jump in sales this year, and 19% next year, with an even fatter increase in earnings per share. I don’t see any long-term problems coming out of this release and, at a P/E of 11, this stock looks like a bargain right now. Dahlman Rose notably cut its price target to $23, indicating it still sees a healthy upside.

Looking for more info on Spirit Airlines? Just add it to your Watchlist by clicking right here.

Fool contributor Jeremy Bowman holds no positions in the companies in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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