Low-cost air carrier Spirit Airlines (NYSE:SAVE) recently reported its so-so fourth-quarter results. The company pointed toward a disappointing first quarter of 2021 but expects to pick up the pace in the second. However, Q1 has been good to SAVE stock investors, as the share price is up 51% this year.
There are likely more gains ahead. Demand forecasts toward the end of March and midyear are highly encouraging, as the airliner targets a strong recovery by 2022. SAVE stock represents one of the most attractive recovery plays in the airline business.
The sector has been rallying on the back of the improving Covid-19 trends. The exchange-traded fund U.S. Global Jets ETF (NYSEARCA:JETS) is up 46% in the past six months. That is a crazy stat, considering how the global pandemic obliterated the industry last year. SAVE stock is the fifth-largest holding in the ETF’s 43-stock current portfolil.
With that being said, let’s dive a little deeper into Spirit’s recent progress.
SAVE Stock Faces Tepid Q1 Forecast
Spirit reported mixed Q4 results last month, with its loss per share at $1.61 on revenues of $498.5 million. These numbers fell short of analyst expectations of a $1.43 loss on revenue of $516 million. Additionally, the airliner pointed towards traffic and financial weakness in the first quarter this year.
The company expects its first-quarter margins to be at a deplorable negative 50% compared to a negative 18% in its most recent quarter. Revenue forecasts are expected to be down 50% as well, further complicating things.
The lower margins are primarily linked to an increase in capacity. The airliner is beefing up its capacity by taking on new plane deliveries and will bring its A319 planes back into service again. It forecasts Q1 capacity to be down just 17% from the same quarter in 2019. Therefore, Q1’s financial troubles will be comfortably offset by the growth in demand in the second quarter.
The increase in capacity will enable Spirit to effectively handle demand during the busy summer months. With vaccine distribution heating up, we could be looking at massive jumps in traffic levels this year.
At the end of Q4, the airliner had an impressive cash balance of $1.9 billion. Additionally, it’s burning roughly $1.8 million per day, which is significantly less than its peers. Therefore, it has enough liquidity to breeze past any short-term troubles and expand its capacity to cater to an expected increase in demand.
Traffic Trends Heading in Right Direction
TSA traffic trends currently support the notion of a potential rebound in mid-2021. In the last two weeks of the holidays, numbers regularly eclipsed 1 million, averaging 47% of the prior-year period. The average throughput for the first three months of the year is 60% lower than 2020. However, it is still a step in the right direction for the airline industry.
As mentioned, Spirit Airlines will be ramping up its capacity to deal with the elevated demand levels from mid-2021. It wishes to run an additional 20% airplanes this year due to the additional deliveries since 2019. The carrier expects to take its total fleet up to 190 by the end of 2022.
Analysts are pointing toward $6.50 earnings per share by 2022. However, with a diluted share count of roughly 110 million shares, that number should drop to around $4.
Final Word on SAVE Stock
SAVE stock has been panned by short-sighted investors in the past few weeks. However, the company remains undeterred in expanding its capacity for the sharp increase in demand levels in the second quarter and beyond.
With its low-cost structure and relatively strong liquidity, it is the best airline recovery play at this time. The recent dip in its price presents an excellent opportunity to scoop up the stock at a discount.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.