On Wednesday, Spirit Airlines (NASDAQ: SAVE ) reported a record quarterly profit, as its already strong margins soared to stratospheric levels. Spirit's adjusted EPS more than doubled year over year to $0.79, beating the average analyst estimate of $0.75 . Revenue of $457 million also beat the average estimate, and was up an impressive 33.4% year-over-year .
Despite this strong performance, investors did not seem very impressed. In fact, Spirit shares fell as much as 8% during the day, dropping below the $40 line, before recovering later in the day. Investors may have been spooked by management's discussion of some potential cost headwinds this fall and next year.
However, Spirit is a long-term growth company, and should be understood that way. It is true that Spirit's revenue growth and margin growth are both likely to moderate in the near-term. Longer-term, though, the company's opportunity is enormous. Any significant drop in the stock price in the next year will create a nice buying opportunity for long-term investors.
During Spirit's earnings conference call, CFO Edward Christie stated that non-fuel unit costs would rise 4%-5% in the fourth quarter. This is a notable reversal for a company that has aggressively reduced costs for the last several years .
That said, this increase is almost entirely due to repair and investigation expenses related to an engine blowout that occurred earlier this month . I believe Spirit is being especially conservative in setting aside $10 million to cover these costs. In any case, these costs are one-time in nature, and Spirit may be able to recover some or all of that money from its insurance carrier or the engine manufacturer.
Looking into 2014, Christie projected that expenses may rise. Spirit's growth rate will slow next year, as it will take delivery of seven new planes, compared to nine deliveries in 2013. This slower growth will contribute to higher unit costs, as will new federal regulations regarding pilot rest .
However, another driver of potential cost increases next year is that Spirit will need to start preparing in late 2014 for faster growth in 2015. Indeed, Spirit is scheduled to take delivery of 18 new airplanes from Airbus that year: more than it is receiving in 2013 and 2014 combined !
This growth is what makes Spirit such an alluring investment opportunity. Spirit executives are very confident that the market can support significant expansion on their part. Spirit's current fleet plan calls for roughly doubling capacity in the next four years, with the potential for double-digit growth even beyond that point .
As Spirit's growth rate picks up in 2015 and 2016, unit costs will start to decline again. Not only will Spirit be able to spread its fixed costs over more flights, but the aircraft it is adding are (on average) larger and more efficient than those in its fleet today. Spirit's new planes incorporate fuel-saving Sharklet winglets, and some of the 2015 and 2016 deliveries will use new engine technology that is expected to reduce fuel burn by as much as 15%.
These developments will allow Spirit to keep prices low while boosting its profit margin even further. In other words, even if Spirit's growth cools off in 2014, investors shouldn't worry. Spirit is well positioned for massive long-term profit growth.
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