Imperial Capital Turns Bullish On Spirit Airlines: Here's Why

Shares of Spirit Airlines Incorporated (NYSE: SAVE) have lost more than 25 percent over the past year. The airline's fourth-quarter results led an Imperial Capital analyst to conclude that Spirit shares are trading at a discount. 

The Analyst

Imperial Capital's Michael Derchin upgraded Spirit Airlines' stock rating from In-Line to Outperform with a price target boosted from $42 to $49.

The Thesis

Spirit Airlines' stock is trading at 5x the analyst's fiscal 2019 TEV/EBITDAR estimate, which is notably below the 6x to 9x range which typically assigned to low-cost and value airliners, Derchin said in a Wednesday note.

A more appropriate multiple for Spirit Airlines' stock would be 5.5x, Derchin said, which incorporates the following: 

The acceptance by Spirit pilots of a tentative agreement that was proposed Feb. 5 and will be voted on by the end of the month. The competitive situation with United Continental Holdings Inc (NYSE: UAL) remaining "steady."

The following factors are driving upside to Spirit's earnings and valuation, the analyst said: 

• Spirit Airlines hit an inflection point in the fourth quarter of 2017 and ancillaries now represent 50 percent of total revenue.
• Improving operations results in cost and revenue benefits.
• The expectation that capacity growth will decelerate to a rate in the low-to-mid-teens in fiscal 2019.
• A merger between Spirit and privately owned Frontier Airlines in the near future would come as no suprise, Derchin said. A combination with the ultra low-cost carrier would generate network synergies and the ability to better compete against United Continental, he said. 

Price Action

Shares of Spirit Airlines were up 1.59 percent at $40.94 in the Tuesday morning trading session. 

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Photo courtesy of Spirit Airlines.