Spirit Airlines (NASDAQ:SAVE) stock has been a great investment for its early backers. Despite receiving a steady stream of negative customer reviews and being panned by pundits, Spirit has prospered due to the insatiable demand for cheap airline tickets.
Spirit Airlines stock debuted in May, 2011 at just $12. Since then, it has rocketed higher, surpassing $70 earlier this year.
However, Spirit Airlines stock just went on sale. On Tuesday, Spirit announced it had accidentally underpaid federal excise taxes on some of its fuel purchases for the past several years. As a result, the company's Q3 earnings may come in near the bottom of the guidance range. This sent the stock tumbling -- creating a nice buying opportunity for long-term investors.
Spirit's little gaffe
Commercial airlines like Spirit Airlines pay a $0.044/gallon excise tax on all the jet fuel they consume. That doesn't seem like much, but since most airlines consume hundreds of millions -- or even billions -- of gallons of jet fuel each year, the tax adds up!
Spirit Airlines recently discovered that it had underpaid some of its fuel excise taxes during the last five years due in part to a change in suppliers. The total underpayment was $9.3 million, of which $2.1 million occurred in 2014.
Spirit Airlines plans to include the $2.1 million underpayment from 2014 in its Q3 fuel price calculation in order to "catch up" for the year. As a result, Spirit now expects its Q3 adjusted operating margin to fall in the lower half of its guidance range. (The prior-year underpayments may be reflected as a special charge.)
This isn't a big deal
Based on investors' reaction to this news, one might guess this was a major blow to the investment case for Spirit Airlines stock. However, that couldn't be further from the truth.
First, the guidance that Spirit Airlines provided in July called for a 20.5%-22% adjusted operating margin in Q3. Even if Spirit's margin falls to the bottom of that range, it would represent one of the most profitable quarters for any airline in history. This makes the big drop in Spirit Airlines stock seem like a major overreaction.
Second, the underpayment of excise taxes hasn't been inflating Spirit's earnings in a significant way. The total underpayment was less than $10 million over the course of five years, whereas Spirit posted pre-tax earnings of $330 million for the 12 months ending in June.
Third, in their haste to sell Spirit Airlines stock, investors appear to have overlooked the recent drop in oil and jet fuel prices. In late August, Gulf Coast jet fuel was selling for about $2.866/gallon. By Monday, the price had fallen about 10% to $2.583/gallon.
This is a huge windfall for Spirit. The company currently uses about 50 million gallons of jet fuel per quarter, and jet fuel accounts for nearly 40% of Spirit's total operating expenses. Spirit thrives by stimulating travel demand among lower-income consumers by offering cheap fares. With cheaper jet fuel, Spirit will be able to offer even lower prices to customers.
A great opportunity
The recent sell-off in Spirit Airlines stock is allowing investors to buy shares now at prices that haven't been seen in several months. Just one month ago, Spirit Airlines stock hit a new all-time high of $74. By contrast, it dipped as low as $57.44 on Wednesday, before closing down 5% at $60.17.
Analysts have raised some legitimate concerns recently, such as falling load factors on Spirit's flights. However, these concerns are easily outweighed by the recent drop in jet fuel prices, which will allow Spirit to reduce fares (if necessary) to fill seats without hurting its profit margin.
Based on Wednesday's closing price, Spirit Airlines stock trades for less than 20 times projected 2014 earnings. That's just a slight premium to the broader market, yet Spirit is expected to grow both revenue and profit by 27% next year. This seems like a great bargain -- one long-term investors should jump on before it disappears.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.