What happened
Early this morning, analysts at ace investment banker Stifel Nicolaus announced they are cutting their price target on Spirit Airlines (SAVE -3.80%). The stock promptly jumped 10.5% in price.
Wait. What?
Image source: Spirit Airlines.
So what
Yes, you read that right. Stifel cut its price target, but Spirit reacted positively to the news. Now, there are a good handful of reasons why this seemingly strange reaction actually makes sense. For one thing, although Stifel no longer thinks Spirit Airlines stock is worth $55 (as it previously did), the analyst does still think the stock is worth $45 -- and that's still a good $10 more than what Spirit stock costs today. It's also worth pointing out that Stifel Nicolaus recognizes this gap between price and value, and is therefore maintaining its "buy" rating on the stock.
Additionally, Stifel advised investors that in its opinion, Spirit's airfares have "at the very least" stabilized, and are no longer falling, which should be good news for the company's profits.
Plus, there's the fact that with prices firming, Spirit Airlines yesterday raised guidance for the revenue per available seat mile (RASM) it expects to collect in Q3. Instead of the 7% to 8.5% decline in RASM previously forecast, management says it now thinks it can hold the line at a 6.5% decline.
Now what
A trio of big hurricanes down south are to blame for much of the declines in Spirit's revenues this quarter. Labor disputes have also contributed to an expected decline in both revenue and profit margins earned on that revenue.
Going forward, Stifel sees the greater potential for trouble coming from competition with other airlines driving prices down -- hence the lower price target. If price wars can be averted, though, we just might see price targets on Spirit stock raised back up again.
