SPIRIT AIRLINES INC SAVE
October 28, 2015 - 4:52pm EST by
Coyote05
2015 2016
Price: 34.60 EPS 0 0
Shares Out. (in M): 72 P/E 0 0
Market Cap (in $M): 2,488 P/FCF 0 0
Net Debt (in $M): -211 EBIT 480 388
TEV ($): 2,280 TEV/EBIT 4.75 5.88

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  • Airline
  • low-cost producer

Description

 

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

  • Stable share count (despite minimal share repurchases)

  • Reasonable comp

    • pay for performance

    • large at-risk component, mostly paid in stock

    • motivated to achieve low operating costs

 

  • 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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