I'm Still Convinced This Company Is a Dud

Back in December 2011, I went searching for what I thought would be a great stock to short -- or bet against -- for this year. That company was ultra-discount airline  Spirit (NASDAQ: SAVE  ) .

Since I entered that pick into my All-Star CAPS profile, it's actually beating the market by about 4 percentage points. Some might consider that a "win"; I don't. But the thing is, a single year is a pretty arbitrary timeline for an investment thesis to play out. Read below and see why I still think investing in Spirit is a mistake, and at the end, I'll offer up access to a special free report on The Motley Fool's Top Stock for 2013.

A quick review of the stock's performance
If we were to start tracking based on the beginning of the new year, here's how Spirit's stock has compared to the S&P 500's return.

SAVE Total Return Price Chart

SAVE Total Return Price data by YCharts.

As you can see, the company was flying high for a good portion of the year, only to take a precipitous 30% fall since early May.

Reviewing my thesis
In essence, the reason I'm not a big believer in this company is because it nickels-and-dimes customers at every corner, and I just don't think enough customers are willing to have such unpleasant experiences on a repeated basis.

As I wrote last year: Round-trip, you have to pay up to $80 for carry-ons, having an agent print your boarding pass will end up costing you $5 per pass, picking your seats can cost you up to $20, and you even have to pay $3 for water on board (but, of course, the salty pretzels that you get are free).

On top of that, the average amount of room between where your knees go and the seat in front of you is a paltry 28 inches, or almost 20% less than the next-most-cramped airline.

Of course, investors in Spirit will point to the company's balance sheet to explain why it has a bright future. Compared to the rest of the industry, it may appear that they have a point.

Company

Total Cash

Total Debt

3-Year Revenue Growth

3-Year Net Income Growth

Spirit

$399 million

$0 

21.77% 

10.5% 

US Air (NYSE: LCC  )

$2.4 billion

$4.6 billion 

8.74%

N/A 

Southwest (NYSE: LUV  )

$3.2 billion

$3.2 billion 

17.4%

N/A 

United Continental (NYSE: UAL  )

$6.7 billion

$12.2 billion 

29.9%

N/A 

Delta (NYSE: DAL  )

$3.2 billion

$13.1 billion 

8.8%

N/A 

JetBlue 

$1.1 billion

$3.7 billion 

13.7%

N/A 

Source: SEC filings, Yahoo! Finance, Fool.com.  N/A = not applicable, because company was not profitable over the given time frame.

Just looking at that last column alone might make you think that Spirit would be a great investment. And I wouldn't blame you for thinking that. But a closer look at how the company makes its money shows an alarming trend.

Usually, the bulk of income for an airline is through the sale of tickets -- though charging for checked bags has become an increasingly greater portion of revenues across the board as well. But as I stated above, Spirit charges for much more than checked bags, and all of those add-ons have become an increasingly bigger slice of the revenue pie.

Source: SEC filings. 2012 numbers are for the first nine months of the year.

What was once a 10% slice of the revenue pie now accounts for 40% of all money coming in. You might think the ability to grow this number means people don't mind the nickel-and-diming. I would argue that there's just still a lot of people left to dupe.

Remember, Spirit is still growing its base of operations and destinations. I firmly believe that if the company's business practices continue as such, markets that the company moves into will boom, and then fall off significantly.

In fact, it's already started to happen. The average revenue brought in by passenger tickets divided by the total number of flight segments is down 6.8% over the first nine months of 2012.

And customers are voicing their displeasure with the airline. Skytrax, which bills itself as having the world's largest airline review site, offers telling evidence. Here's the average rating of customer satisfaction for the following airlines.

Airline

Customer Review Rating (out of 10)

Southwest

8

JetBlue

7.5

United Continental

5.5

Delta

5

US Airways

3

Spirit

2

Source: Skytrax. 

Clearly, I think that given enough time, Spirit and its stock will sink to a more fitting place in the stock market: toward the bottom.

For better ideas in the year ahead, we have just the thing for you.  The Motley Fool's chief investment officer has selected his No. 1 stock for the next year.

Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On December 17, 2012, at 6:08 PM, TMFGemHunter wrote:

    You've raised some good points, but I think that Spirit is a pretty good investment for the long term. I don't think it's surprising or alarming that ticket revenue is down; it's part and parcel of moving the business to more of an emphasis on fees for anything beyond the basic service (i.e. getting from point A to point B).

    In my opinion, consumer behavior has overwhelmingly shown that people will choose the cheapest ticket. They will complain about the service and the nickel and diming, but next time they will choose the cheapest ticket once again. Spirit can underprice competitors by a wide margin, and that's a surefire way to win customers.

    The biggest risk to Spirit is the erosion of their cost structure. There was a nasty pilot strike in 2010, although Spirit recovered pretty well from that.

  • Report this Comment On December 17, 2012, at 11:45 PM, Topcop3003 wrote:

    I don't even know where to start with all the inaccuracies in this analysis. If you are going to offer opinion on a company you should have an idea of what the company does.

    The biggest fault with you opinion is trying to compare Spirit to how airlines have traditionally operated in the USA. Spirit is the 1st and only Ultra Low Cost Carrier in the USA and operates on a totally unique business model.

    Spirit charges the lowest possible fare and allows the passenger to only pay for what they use. Do you really think that the bags really fly free at Southwest, that TV on Jet Blue is free or Delta gives you a coke and snack out of the goodness of their heart? The answer is NO. The cost of those items is included in your fare whether you use them or not. If you don't use those items you are subsidizing those who do. Also federal tax is charged on the fare only do there are major tax advantages to un-bundle the fares. There are no taxes charged on the options you pick, only the base fare.

    Your assumption that they are trying to dupe customers is also false. When I booked a flight without paying for bags I was asked twice when booking if I was sure I didn't need to pay for a bag. Also, I got 2 emails reminding me I had not paid for a bag prior to departure. When checking in online I was advised I could avoid the boarding pass fee by printing my boarding pass at home. I have never felt duped. The customer service issues mostly seem to arise from people not being used to the different way of doing business.

    Example: My recent FLL-LAX last minute trip I booked on Spirit for $548+$50 for r/t exit row seat+$60bag+$6 coke= $664 Total

    Jet Blue $1308 fare+ free bag+ free coke and TV=$1308 total

    Virgin America $1087 fare+$50 bag+ free coke=$1137 total

    My savings were $473 off the next lowest fare.

    Say what you want but you need to look at the total cost.

    Spirit operates the newest airbus fleet in the country and is expanding quickly. The planes are always full so you have some serious holes in your analysis.

  • Report this Comment On December 18, 2012, at 3:37 PM, spankymywanky wrote:

    Way to go Topcop...you laid it out nicely.

    I'm a fan of Spirit and I actually think the more people fly them, the more they will understand and be able to appreciate the "unbundling" process. The first flight for me was different than I was used to but now I love it. I was able to book 4 tickets over the holidays for my family with bags and seats paid for under $500. Unbelievable.

    God forbid a company try and create a better mousetrap and actually make money as an airline AND offer the flying public a cheaper alternative.

    The funny thing is that all other carriers are starting to do this and want to do it more. Southwest is even trying to do it. The point with Southwest is that they are doing this on AirTran and not on Southwest not by choice. It's because their IT system won't allow them to do it. It would cost them millions to upgrade their systems to do it. So instead they spend money on an ad message saying bags fly free. What they should say is that if you don't carry bags (or 2 bags) you are helping to pay for the bags of your neighbor. Enjoy that the next time you just have a carry on...

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