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Why Spirit Airlines Stock Popped 11%

By Rich Smith – Oct 25, 2018 at 9:23AM

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Sales are coming in close to on target, and earnings are soaring.

What happened

Shares of Spirit Airlines (SAVE 0.12%) stock are up 10.9% as of 3 p.m. EDT after the discount airline reported fiscal third-quarter 2018 earnings that beat Wall Street's earnings forecast soundly -- and edged out revenue estimates as well.

Expected to earn $1.39 per share on $904.1 million in sales in its third quarter, Spirit instead reported a GAAP profit of $1.42 per share, with sales coming in just ahead of estimates at $904.3 million.

Yellow Spirit Airlines plane

Image source: Spirit Airlines.

So what

Spirit's sales climbed 32% year over year, primarily as a result of more passengers buying tickets, as opposed to Spirit charging higher prices for those tickets. Operating yields also improved 3% as Spirit did a better job of filling its planes with passengers before takeoff. As a result, "total operating revenue per available seat mile," or "TRASM,") grew 5.5% in Q3.

Operating costs climbed as well, up 30% year over year, with fuel costs rising more than twice as fast. But with sales rising faster than costs, Spirit ended up growing its earnings substantially despite the higher cost of doing business. Operating profits jumped 40% -- and net income 65%.

Now what

As Spirit taxis into the fourth quarter, the question becomes: Can the company keep it up? Wall Street isn't optimistic. Current estimates call for a reversal of Q3's success in Q4, with sales expected to grow a strong 19%, but higher costs increasingly eating into that revenue, and a resulting 19% decline in profits. Analysts think Spirit will earn only $0.59 in the year's final quarter -- not little enough to push the full year into a decline, but enough to reduce full-year earnings growth to a bare 2%.

On the plus side, though, these are the same analysts who underestimated Spirit's earnings prowess in Q3 -- and they've just set Spirit a very low bar to clear in Q4.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of Spirit Airlines. The Motley Fool has a disclosure policy.

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