Please ensure Javascript is enabled for purposes of website accessibility

Spirit Airlines Stock Could Double by 2020

By Adam Levine-Weinberg - Updated Apr 12, 2019 at 4:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With the budget carrier continuing to post strong EPS growth, investors are likely to send Spirit Airlines stock skyrocketing sooner rather than later.

In late 2016, I wrote that shares of Spirit Airlines (SAVE 2.90%) could reach $100 by 2020. Since then, there's been a lot of movement -- both up and down -- for Spirit Airlines stock, but the share price is almost exactly back where it started.

That shouldn't faze investors. In fact, Spirit Airlines looks like an even better buy today than it did when I wrote my initial article. The carrier has demonstrated strong unit revenue momentum over the past few quarters, which puts it on track to deliver exceptional earnings growth in 2019 and perhaps also 2020. Considering Spirit Airlines stock's rock-bottom valuation, there's a good chance the stock will double to more than $100 by sometime next year.

Earnings growth is accelerating

Revenue per available seat mile (RASM) surged 11.4% at Spirit Airlines last quarter. As a result, adjusted earnings per share nearly doubled to $1.38, even though the airline faced substantial cost headwinds during the quarter.

Spirit's guidance for the first quarter of 2019 calls for RASM to rise by 5%. Based on that outlook, analysts expect adjusted EPS to more than double to $0.91 from $0.44 a year ago. That would be particularly impressive, because most Easter-related travel fell in the first quarter in 2018, whereas Easter is in late April this year. Spirit's management expects that calendar shift to hurt RASM by about 2.5 percentage points in Q1. The launch of numerous new international routes in recent months is also creating a temporary drag on unit revenue.

The Easter shift will boost RASM by a similar amount next quarter, while the headwind from Spirit's new international routes should lessen. That will cause RASM growth to accelerate, possibly reaching double-digit territory again. Comparisons will get harder in the second half of the year, but if the economy remains reasonably strong, unit revenue should continue rising.

Check out the latest earnings call transcript for Spirit Airlines.

A yellow Spirit Airlines jet parked at an airport gate

Spirit Airlines is on track to achieve strong RASM growth in 2019. Image source: Spirit Airlines.

Meanwhile, Spirit Airlines' nonfuel unit costs are on track to rise 2% to 3% this quarter, but only 1% to 2% for the full year. Based on where oil prices currently sit, Spirit Airlines is also likely to see greater fuel cost savings in the rest of 2019 than in the first quarter -- although that could certainly change, as oil prices tend to be quite volatile.

Thus, strong revenue trends and favorable cost trends will cause EPS to fly higher in 2019. Analysts currently expect adjusted EPS to jump 49% to $6.55, and that estimate could be too conservative.

The momentum could continue in 2020

For 2020, analysts on average expect Spirit Airlines' EPS to reach $7.02. That would be up only 7% year over year, whereas revenue is projected to rise nearly 15%.

The range of potential outcomes is extremely large, as oil prices, economic conditions, and competitors' actions could all impact Spirit Airlines' financial performance. However, there are some compelling reasons to believe that Spirit can do better than the modest margin contraction implied in analysts' estimates.

First, Spirit Airlines is rolling out Wi-Fi across its fleet this year. That will open up a meaningful new ancillary revenue stream. Second, Spirit plans to update its loyalty program and co-branded credit card, which could also boost non-ticket revenue.

Third, several small factors -- including a modest shift toward shorter flights, a decision to lease more aircraft rather than buying them outright, and a big pilot pay increase implemented a year ago -- are driving Spirit Airlines' unit cost growth this year. There's a good chance that Spirit will return to its historical pattern of flat or slightly declining nonfuel unit costs in 2020. That would give the carrier a good chance of improving its pre-tax margin again next year.

Spirit Airlines stock is too cheap

Despite the company's strong momentum, Spirit Airlines stock trades for a bizarrely low eight times forward earnings. This valuation is even more puzzling when you consider that Spirit expects to continue growing capacity at a double-digit rate for the foreseeable future.

Spirit Airlines could potentially earn $8 per share next year with a roughly 16% pre-tax margin: well below the 19.8% adjusted pre-tax margin it earned in 2016 and the all-time high 23.4% adjusted pre-tax margin it posted in 2015. Spirit Airlines stock would only have to trade for 13 or 14 times earnings to double to $106. Even in the airline industry, that seems like a very modest valuation for a company with Spirit's growth prospects.

It's possible that a spike in oil prices, a sharp downturn in the economy, or a strategic misstep by management will prevent Spirit Airlines from achieving its earnings growth potential in 2019 and 2020. Fortunately, Spirit Airlines stock offers a big margin of safety in a downside scenario. And if all goes well, the sky is the limit for this high-growth airline stock.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
SAVE
$24.52 (2.90%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.