Spirit Airlines (NYSE: SAVE) is a high-risk investment that only the most aggressive investors should be looking at right now. Once you get past that screen, the next big question is whether the risk is worth the reward. Spirit is in a high-stakes battle to avoid bankruptcy, but even if it succeeds, it likely won’t be a feat that will create millionaires.
Spirit Airlines is a budget airline and there is nothing wrong with that. The problem is that airlines always operate on tight margins, so if things don’t go well, the impact on the bottom line can be very bad. In this case, the coronavirus pandemic has sent Spirit into a spiral from which the company has yet to recover.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
As the chart above shows, Spirit’s revenues fell during the pandemic. That makes perfect sense, given the situation at the time. But profits have yet to recover even as the world has learned to live with COVID-19. That’s clearly a big problem for Wall Street, highlighted by Spirit’s steadily declining stock price. The problem here is that Spirit’s business model is based on selling cheap tickets that require customers to pay extra fees for things like selecting a seat or bringing a suitcase on the flight. This has given the airline a bad reputation, because the fees it charges are perceived as a nuisance. And after the pandemic, other airlines, with better reputations, have started competing more on price to win back customers. Given the stripped-down range of services Spirit sells, it has had a hard time competing.
In the midst of this dismal financial performance, Spirit threw a Hail Mary pass, agreeing to be repurchased JetBlue (NASDAQ: JBLU). In short, the company’s management decided to let someone else handle the mess because it was intent on salvaging as much shareholder value as possible. The problem is that JetBlue has a pretty big airway at this point and it looked like regulators would block the deal, causing JetBlue to call off the wedding.
Financially struggling Spirit Airlines suddenly found itself in an even more precarious position than before the proposed JetBlue deal. That’s because valuable time had passed while nothing was actually done to strengthen the underlying activities. The risk of bankruptcy here is very real.
This statement is supported by the company’s actions. That includes cost savings and aircraft sales. These are the kinds of steps that deeply troubled companies take as they try to keep their doors open long enough for something, perhaps anything, good to happen. Right now, the best chance seems to be that Spirit makes a new deal to sell itself. Rumor has it that there are discussions to this end Border groupowner of Frontier Airlines.
The problem is that Spirit is clearly operating from a position of weakness at this point. If it can reach an agreement with Frontier Group, the price it fetches for the company will likely be only modestly above the current share price. Even if Spirit were to manage to get a 100% premium to the current share price, which is highly doubtful, the stock is currently only trading for around $6 per share. To reach millionaire status, at best, you would need to own a huge amount of stock.
So now that you know the backstory and have thought about the best outcome, consider the worst case. A bankruptcy would probably not bring any benefits to shareholders. The balance here looks like a total loss if you’re wrong, with only a modest gain if you’re right. That’s a very poor risk/reward profile, especially since you would have to invest huge sums of money to turn this trade into a move that would make millionaires. Even very aggressive investors should probably avoid Spirit Airlines at this point.
Consider the following before purchasing shares in Spirit Airlines:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Spirit Airlines wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $904,692!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns November 4, 2024
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is Spirit Airlines a Millionaire Stock? was originally published by The Motley Fool
