Friday, November 1, 2013

Spirit Airlines (SAVE) Q3 Earnings Release and Price Target Increase

Spirit Airlines reported strong results this past Wednesday that beat consensus as well as our estimates. Revenue of 456 million was an increase of 30% year over year, a result primarily of volume growth of 28%, and 2% related to pricing. Additionally, Earnings per share was reported at $.79 a $.04 beat on consensus, and beating our estimates by $.01. The strong quarter was primarily priced in after Spirit announced in early October that revenue per available seat miles increased 10%, almost double the guidance management set of 4%-6%. As a result, Spirit saw very volatile trading throughout the day, as the stock increased as much as 6% at the open, and declined approximately 10% at the lows of the day. The stock eventually recovered and closed only .5% lower. The stock trading down was most likely a result of a mix in profit taking, and guidance that wasn't quite as optimistic as investors had hoped.

2013 traffic growth is now expected to reach approximately 25%, with full year income increasing 30%. However the 2014 guidance was a little lighter than would have hoped. Air traffic growth is expected to grow 15% for 2014, resulting in a 20%-22% increase in full year EPS. Additionally, costs per available seat mile (CASM) is expected to be a challenge in the first and second quarter, after a decreasing CASM in 2013. This is still strong growth, outpacing the industry, however it was expected that the numbers would come in slightly higher.

After the strong Q3, a projected comparable Q4, and tempering our 2014 outlook to numbers that are still strong, we have increased our price target on Spirit to $49 from $42. We believe our thesis of growing market share by having the lowest fare prices and lowest cost in the industry and expanding into newer domestic markets remains intact, and reiterate our Buy rating.

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