The market is offering an opportunity to buy a high quality company at a deep discount. In summary, SAVE trades at a fraction of the valuation of its peers despite being the low cost provider, growing faster, having higher returns on capital, and a strong management team.
In the interest of efficiency, instead of writing long-form paragraphs, I am using bullet points. Should it end up being too cryptic, I would be more than happy to expand in the q&a.
Thesis
Low cost provider
Fast growing, with plenty of runway (under competitors pricing umbrella)
Higher returns on capital than peers
Attractive valuation: absolute and relative (to competitors and own history)
Hard to envision a reasonable scenario under which SAVE is worth less than $35
How did we get here
Airline market in transition from high fuel prices to low fuel prices
compression in unit revenue
lower unit (fuel) costs
SAVE experiencing pricing pressure not yet apparent on competitors
Capacity still growing
Stock market does not like discontinuities
difficult to model; how low can margins, fcf, etc go?
limited guidance from management
What’s to like
Low cost provider
new fuel-efficient fleet
high utilization
low complexity
one type of aircraft (A320)
no connections (point-to-point, big-city to big-city)
Fast growing. Plenty of runway
SAVE is growing fast, and will continue to do so,
Low ULCC penetration in the US (~5%) vs Europe (~20%)
Order book will double capacity over 5 years or so
High returns on capital
Steady state ROIC at least double that of its competitors; ROE much higher
Low cost financing; just issued 4.2% long term paper to buy airplanes
Transitioning from leasing to owning
ebit/asm
asm/plane per year
cost/plane($m)
roic*
roe, pre tax**
2011
2012
2013
2014
2015
SAVE
1.5
1.5
2.0
2.2
2.3
310
48
12%
61%
JBLU
0.9
0.9
1.0
1.1
2.5
230
38
6%
15%
LUV
0.6
0.5
1.0
1.7
2.8
204
40
5%
3%
UAL
0.7
0.0
0.5
1.0
2.2
311
60
3%
-18%
* ROIC = ebit/cost; ebit avg 2011-2014
** ROE w/ 90% of cost financed with 5% debt; ebit avg 2011-2015 (more favorable to jblu, luv, ual)
Management
Delivering superior unit economics while growing fast
Superior (for shareholders) compensation policies (from proxy):
WE DO
WE DO NOT
Target total direct compensation for our NEOs at the market median (50th percentile overall)
Allow hedging or pledging of Company securities
Pay for performance and, accordingly, a significant portion of each NEO's total compensation opportunity is "at risk"
Encourage unnecessary or excessive risk taking as a result of our compensation policies and practices
Base our short-term incentive plan on more than one performance measurement, including both financial and operational metrics
Provide perquisites to our NEOs that are not generally offered to all other executives
Complement our annual compensation to each NEO with time-based and performance-based multi-year vesting schedules for equity incentive awards granted for prior-year performance
Have employment agreements with any of our NEOs other than our CEO
Select and use a peer group of similarly sized airlines to assess the compensation of our NEOs and a peer group of publicly traded airline companies to measure the Company's total shareholder return.
Provide a defined benefit pension plan or any supplemental executive retirement plan or other form of non-qualified retirement plan for our NEOs
Maintain a clawback policy pursuant to which the Company can seek reimbursement of either cash or equity based incentive compensation in the event of a financial restatement
Provide for any "gross ups" for any excise taxes imposed with respect to Section 280G (change-in-control payments) or Section 409A (nonqualified deferred compensation) of the U.S. Internal Revenue Code of 1986, as amended (which we refer to as the "Code")
Have stock ownership guidelines for our executives and non-employee directors
Provide for, under our 2011 Plan or our proposed 2015 Plan, single-trigger vesting acceleration upon a change in control of the Company unless the acquirer does not assume or replace the award
Engage an independent compensation consultant to advise the Compensation Committee, which is comprised solely of independent directors
Allow, under our 2011 Plan or our proposed 2015 Plan, any repricing of stock options/stock appreciation rights without stockholder approval or unlimited transferability of awards
Valuation
Trading at a deep discount (on steady state metrics)
Strong balance sheet
TEV/asm
(cents)
ebit/asm
(cents)
TEV/ebit
roic*
Net debt
($m)
SAVE
10.7
1.8
5.9
12%
(211)
ALGT
33.7
1.7
19.9
n.a.
250
JBLU
17.9
1.0
18.2
6%
803
LUV
21.1
0.9
22.6
5%
(428)
UAL**
11.5
0.7
15.7
3%
6,522
* ROIC = ebit/cost; ebit/asm avg 2011-2014
** UAL net debt excludes postretirement obligations ($4b+ > assets)
Risk/reward
Base scenario: return ebit/asm to 2.0
Downside scenario: new-normal ebit/asm 1.5
Valuation metrics as of 12/31/2016 (asm and net debt)
Scenario
asm
(b)
ebit/asm
(cents)
ebit
($m)
multiple
(TEV/ebit)
net debt
($m)
stock price
($)
Base
28.8
2.0
576
10.0x
200
77
Base35
28.8
2.0
576
5.0x
200
35
Downside
28.8
1.5
432
10.0x
350
55
Down35
28.8
1.5
432
6.6x
350
35
Risks/headwinds
Minimal insider ownership
Cost pressure in 2016:
Excess wear and tear on aircraft coming off lease 2016
Additional cost pressure from major maintenance
Mitigants: larger gauge aircraft, scale benefits, guidance flat/declining casm x fuel over time
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
ebit/asm at 1.5 cents or better
watch for insider purchases; could be tell tale on timing
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