Spirit Airlines Is a Turnaround Play With Huge Risks

Spirit Airlines (NYSE:SAVE) announced last week that it $150 million in equity from the sale of new SAVE stock. Moreover, the company declared that it had $1.2 billion in liquidity at the end of the second quarter.

A yellow, Spirit Airlines (SAVE) branded airplane flying in the air
Source: Markus Mainka / Shutterstock.com

This means that Spirit, an ultra-low-cost airline, has over $1.35 billion in liquidity by the end of July, before the monthly cash burn. The company said that it was burning about $1.5 million per day in June. that works out to $45 million per month.

So, this effectively means Spirit has well over two years, up to 30 months in liquidity, assuming the monthly cash burn does not worsen. In addition, this does not even include some other options the company has for liquidity enhancements.

Additional Liquidity for Spirit Airlines

For example, CEO Ted Christie said during the Q2 conference call on July 22, that the company is expecting to receive $33 million from the U.S. government. This is an additional amount it borrowed under the CARES Act program.

In addition, Spirit has an additional $741 million of unencumbered assets of up to $741 million under the CARES Act. It has applied for another loan under that program and has until Sept. 30 to decide whether to accept the loan.

If Spirit took down that loan, it would have well north of $2 billion of liquidity.

But here is where the story gets worse. Christie said that the company expects its daily cash burn to increase to $3 million to $4 million per day in the third quarter. That works out to between $93 million to $124 million per month.

So realistically that puts the company’s ability to survive at 15 to 16 months before it has to raise more capital.

Even with the resurgence of the novel coronavirus, most analysts expect that there will be a vaccine available to the public well before the end of that period. For example, even if a valid vaccine was not available to most travelers for a year, just the existence of the vaccine would likely spur more travelers.

What Analysts Say About SAVE Stock

Barron’s reported that Spirit Airlines, known for its cut-rate fares, produced a worse than expected loss for the second quarter. But more importantly, it said that the airline expects its Q3 capacity to be down only 32% for the quarter. That will be a lot better than Q2 capacity, which was down 83%.

J.P. Morgan analyst Jamie Baker gave Spirit Airlines and underweight rating after earnings came out, according to MarketWatch. He wrote that SAVE stock has more risk than even American Airlines (NASDAQ:AAL).

However, 14 analysts polled by Yahoo Finance expect the company to have positive earnings by the end of 2021. Their average estimate is $1.25 per share. Seeking Alpha’s poll of 13 analysts is for just 71 cents per share in 2021.

The average between the two is about $1 per share. That puts SAVE stock, trading at $16.47 per share, at 16 to 17 times earnings for 2021.

What To Do With SAVE Stock

The truth about investing in Spirit Airlines is clearly a turnaround story. However, the company, at this point seems to have enough liquidity to last until things will turn around with travelers.

But there is a clear risk here. Taking on so much debt means that the company may have to raise equity capital again sometime in the future. That could occur even if its business does turn around. Therefore, that might mean further dilution to existing SAVE stock shareholders sometime in the future.

I suspect that there might be an opportunity for the stock cheaper. It’s usually best to buy turnaround stocks if you are so inclined when the picture is the darkest.

Dedicate only a small portion of available investing funds for this kind of play. The key is that it must be money that you can afford to lose in some manner. Even if you think SAVE stock is going to survive and thrive, then allocate just a small portion of your funds for this kind of play.

As of this writing, Mark Hake, CFA holds a position in American Airlines (AAL). Mark Hake runs the Total Yield Value Guide, which you can review here.

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/save-stock-spirit-turnaround-play-huge-risks/.

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