Considering a 98% decrease, Should Investing in Spirit Airlines Shares Be Considered Now?
Considering a 98% decrease, Should Investing in Spirit Airlines Shares Be Considered Now?
Just like planes taking off and landing, shares of Spirit Airlines (SAVEQ -0.36%) have taken investors on a wild ride. This journey, however, has been filled with excessive turbulence.
This company has made for a disastrous investment. Currently, this airline stock is trading at 98% off its all-time high, a milestone reached nearly a decade ago. At this rock-bottom price, is it the right time to buy Spirit Airlines?
Fluctuating Fortunes
Things took a brief turn for the better lately. Between October 18 and November 11, shares of this troubled airline spiked 131% higher. The company initially gave investors a glimmer of hope when it announced it had secured an extension from bondholders to refinance its debt.
Earlier in the year, Spirit Airlines' planned merger with JetBlue Airways was halted by a federal judge due to concerns that it would have lessened competition in the lower-tier airline market. The stock plummeted significantly following this announcement.
There was a glimmer of hope that a new deal was in the works, contributing to Spirit's recent short-lived rebound. The company had been in talks with Frontier Group regarding a possible merger. However, these discussions fell through.
This leaves Spirit Airlines in a precarious position. The company is expected to file for bankruptcy protection in the near future. It has also revealed that it will not be able to file its Q3 2024 10-Q on time.
Value Trap
Investors may have been encouraged by the market's renewed optimism towards Spirit Airlines, but that optimism has waned. I still believe it's extremely challenging to be bullish on the company or its stock, despite the shares trading at an ultra-low price-to-sales multiple of 0.03. In my opinion, this is a classic value trap. Yet, this valuation shows just how far the market has soured on Spirit's prospects.
The challenges are hard to ignore. For starters, the company is struggling to increase its revenue. Q2 sales, which ended on June 30, totaled under $1.3 billion, a 10.6% decrease year over year. This marked the fourth consecutive quarter of a year-over-year decline in revenue.
Management pointed to "significant industry capacity increases and ancillary pricing changes" as key factors pressuring the top line. Spirit's business model revolves around charging travelers for various non-fare items, such as seat selection, baggage, or food and beverages. However, the competitive nature of the industry has forced the company to lower prices in these areas.
Since June, Spirit Airlines has reported cumulative operating losses of $359.8 million. This is not a new development. In fact, the company has not reported positive operating income for a full year since 2019. This is a concerning trend that highlights the company's financial struggles.
Spirit's revenue declines and operating losses stand out in the airline industry. The top four airlines, Delta, American, United, and Southwest, all reported an increase in revenue and positive operating income in their latest respective quarters.
The balance sheet is also less than impressive. As of June 30, Spirit Airlines carried a staggering $3.3 billion in long-term debt, which is more than 20 times higher than its current market cap. Given the company's struggle to achieve profitability, debtors have valid concerns about Spirit's ability to meet its obligations.
Perhaps a merger with Frontier, had it been successful, would have created a stronger airline with a better financial situation and growth prospects. However, this is no longer an option. Any future merger discussions with other potential partners are uncertain. Consequently, investors should steer clear of this troubled stock, regardless of its current low price.
In light of Spirit Airlines' financial struggles, some investors might consider this as an opportunity for low-cost entry into the company's stock, hoping for a potential turnaround. However, given the airline's high debt and lack of operating income since 2019, analysts often warn against falling into a value trap.
Despite the allure of Spirit Airlines' current low price-to-sales ratio, the company's revenue declines and significant industry debt remain major concerns for potential investors, particularly considering the unfavorable competition in the airline market.