Earlier in July, Spirit Airlines (NYSE:SAVE) reported Q2 earnings that highlighted what a difficult year 2020 has become for most airlines and travel shares. Year-to-date, SAVE stock is down close to 60%, hovering at $16.50. However, that metric tells only half the story.
On March 19, the shares hit an all-time low of $7.01. Since then, Spirit Airlines stock is up over to 125%. Put another way, if you had invested $1,000 in the business in early spring, you would now have over $2,250.
Spirit Airlines currently operates scheduled flights between 77 destinations throughout the U.S., the Caribbean, and Latin America. According to the company, these important routes highlight the “demographic affinity between Florida [and] the Caribbean and Latin America.”
Most analysts concur that air travel volumes will need years to recover to pre-COVID-19 levels. Therefore today, I’ll take closer look at what to expect from the shares in the rest of the year. If you are a long-term investor, you may consider buying SAVE stock if the price goes below $15, especially toward $12.50-level.
What Q2 Results May Mean For SAVE Stock
Miramar, Florida-based Spirit Airlines, Inc. is an ultra-low-cost carrier (ULCC) airline company. It offers rock-bottom flight fares. In return, it charges for a range of services and amenities before and during a given flight. The ULCC model does not necessarily appeal to every customer.
Research by James Elian and Gerald N. Cook of Embry-Riddle Aeronautical University concludes, “the ULCC business model results in a very focused target segment of those passengers who are concerned solely with obtaining the lowest price for air travel.”
Elian and Cook highlight that the airline is “selling low prices, and compete for customers on the basis of price and rice alone. In the retail world, [it] would be the dollar store.” Over the years, Spirit has built a strong has built customer base to become one of the nation’s fastest-growing airlines.
In Q2, revenue came at $138.5 million, a decrease of 86.3% YoY, due to the decline in air travel since early 2020. Adjusted loss came at $3.59 per share. A year ago, EPS was $1.69.
The company ended up with $1,2 billion in cash. However, the airline’s current cash burn rate is around $1.5 million per day. Given the uncertainty in the industry, Spirit Airlines and Airbus (OTCMKTS:EADSY) agreed to defer certain aircraft deliveries that were originally scheduled for 2020 and 2021. The group ended the second quarter 2020 with 154 aircraft in its fleet.
Despite the YoY decline in revenue, CEO Ted Christie remained hopeful: “The COVID-19 pandemic negatively impacted our second quarter results. However, we were encouraged by our June results and believe they illustrate that when leisure travel demand rebounds and stabilizes, our leading low-cost structure positions us well to be among the first to return to profitability.”
Following the earnings release, SAVE stock has gyrated between $16 and $17.50.
What Could Derail SAVE Stock Soon?
SAVE stock’s 52-week price range has been between $7.01-$47.50 per share. As I write, the price is hovering around $16.50.
If you are an investor who also pays attention to technical charts, short-term price action urges caution. SAVE stock is likely to be volatile with a downward bias, as recent investors who rode the leg up since March may decide to take some money off the table. If the price goes below $15, the next support level would likely be around $12.50.
Airlines are a capital-intensive business, requiring large amounts of money to operate safely and effectively. According to the International Monetary Fund, the global economy will contract 3% in 2020. Yet, in 2021, the IMF forecasts robust growth.
However, a second wave of the pandemic could easily mean that those projections do not hold. In its Q2 report, the airline said its capacity for July, August, and September would likely be down approximately 18%, 35%, and 45% respectively, compared to the same periods last year. For Q3 2020, capacity is estimated to be down 32% YoY.
Therefore, if you are not yet a shareholder in Spirit Airlines, you may want to wait several weeks before committing new capital into SAVE stock.
But if you already own shares, you may want to ride out any further volatility. Alternatively, you may consider initiating a covered call position. For example, a Sept. 18 expiry ATM (or slightly ITM) covered call would give you some downside protection in the coming weeks. It’d also enable you to participate in a potential up move.
The Bottom Line
The COVID-19 pandemic has caused demand for most travel to plummet. As a result, airline shares, like SAVE stock, have been suffering. And headlines on a potential second wave of the pandemic are hitting newswires worldwide.
Therefore, we may see some profit-taking in SAVE stock. But if you are a long-term investor patient enough to ride out the headwind, another potential decline in Spirit Airlines shares would likely create a viable buying opportunity.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.
