With a wild 2020 in the books, investors are looking ahead to a new year in which the economy's prospects will largely depend on the successful deployment of COVID-19 vaccines.
The speed at which the nation can get people inoculated will determine how quickly we can safely relax our social-distancing efforts and return to something like business as usual. That improved environment will benefit nearly all companies, but two stocks in particular that I think will gain more from it than most are Spirit Airlines (SAVE -1.09%) and Walt Disney (DIS -0.65%).
Look to the skies
Obviously, all airlines will breathe a sigh of relief if vaccines can help get people flying in their pre-pandemic numbers again. My case for investing in Spirit as opposed to other carriers rests on the health of its balance sheet and its position as a low-cost competitor.
According to a recent report from airline industry data analytics specialist Cirium, 2020 erased 20 years' worth of passenger traffic growth. Some might see that as a signal to not touch airlines. To me, it means there are 20 years of business growth back up for grabs when conditions improve. Imagine how a situation like this might play out in any other industry. If, for example, people canceled 40% of their video streaming service subscriptions over the course of a year, that would present an opportunity for every player in the space to win some of those consumers' newly free attention. And it would be an especially good opportunity for the services with the lowest subscription fees.
In the third quarter, Spirit lost $99.1 million, or $1.07 per diluted share. For the first three quarters of 2020, its operating revenue fell by 54.2% year over year, while net income swung to a loss of $271.39 million from a profit of $254 million in the prior-year period. It also didn't help shareholders that the company issued more equity, diluting its stock. In Q3, the weighted-average number of diluted shares in circulation rose by 35.3% year over year.
But the capital Spirit acquired by selling those new shares is what positioned it to weather the storm. With $2.1 billion in cash on hand as of Q3, Spirit is well-situated for the climb back. Skeptics aren't wrong to argue that this will be a slow process. But I'd respond that by the time the status and pace of a recovery become clear, it's usually too late to get the most from an investment based on it.
Dependent on its fourth-quarter cash burn, Spirit still seems to be trading in an acceptable valuation range. Given the amount of air travel that occurred during the holiday season, it seems highly unlikely that its Q4 result would have been worse than its $99 million net loss in Q3. So Spirit's current market cap around $2.4 billion doesn't seem unreasonable.
Make no mistake, there is no magic switch -- air travel won't suddenly return to normal overnight. The rollout of vaccinations already seems to be far less efficient than many had hoped for. But prior to the pandemic, Spirit had put together an impressive string of years of revenue growth, while building a balance sheet to match. From 2015 to 2019, the company remained profitable, and sales and total equity on the balance sheet grew annually. That's what I like to see in any company.
The king of entertainment
Disney's appeal in streaming has given its stock strength recently, despite the brutal hit the pandemic dealt to the theme park segment of the business. In terms of valuation, it seems that investors are starting to look at this company more in the way they view Netflix, and with a more growth-oriented mindset. And the growth rates within Disney's direct-to-consumer business are impressive.
Disney will benefit once visitor traffic to theme parks rebounds. While some of its parks are open with caps on the number of guests, Disneyland in California has been shuttered since March, and the Paris and Hong Kong parks closed again as COVID-19 cases spiked. The resulting hole in the company's revenue picture was too large even for the gains in the direct-to-consumer unit to fill.
For Disney's fiscal 2020, which ended on Oct. 3, direct-to-consumer revenue (which includes its streaming services) increased 81% to a whopping $16.97 billion. That made it the second-biggest source of revenue for Disney last year.
But its total operating income sank by 45% as studios revenue fell 13% to $9.6 billion due to the pause in theatrical releases, and parks and experiences segment revenue fell 37% to $16.5 billion.
Despite all this, Disney's stock is trading near record highs, and it could break even higher once parks revenue recovers. That had been a highly profitable area of the business, and it should help close the gap in total operating income.
The fact that Disney's shares are being valued in a different way than they used to be reflects the nature of the direct-to-consumer model. Right now, the segment is operating at a loss -- $2.8 billion in fiscal 2020, in fact. The market's enthusiasm is for the growth potential. It seems clear that investors are viewing Disney more and more like a large-cap growth play in the tech sector mold. And if parks revenue increase as the threat from COVID-19 recedes, they will only add to a situation where Disney can focus on creating big gains in streaming and content.
One question mark is how long it will take to recoup from last year's damage. Disney reported a loss of $1.57 per diluted share for fiscal 2020. If the company can get that back, this stock could really find a bull case.