Spirit Airlines (NYSE: SAVE) It seemed that it was destined to be merged after it agreed to be acquired JetBlue (NASDAQ: JBLU). Now that the deal has been called off, Spirit Airlines is struggling to stay afloat, and it could still happen that the deal goes away – and maybe not in a positive way. This is a high-risk story stock that investors should approach very carefully.
In a bit of a Wall Street drama, Spirit Airlines got into red ink after the coronavirus pandemic. It had no success in changing that trend, even after the world got used to life with COVID. With maturing debt weighing on its balance sheet, the airline started looking for a suitor to effectively solve its financial problems.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
Spirit was rumored to be in talks Border group (NASDAQ: ULCC)but then JetBlue got involved and won Spirit’s hand. The problem is that JetBlue, while once a small startup, is a pretty big airline at this point. Adding Spirit to the mix raised concerns among regulators that the merger would hurt consumers. The deal was ultimately called off.
Spirit is essentially back where it started, but in a worse position. That’s because time has been lost, and when a company has debt that’s coming due, time is of the essence. Rumor has it that it has revived merger talks with Frontier. It’s pretty clear at this point that Spirit is operating from a position of weakness.
As you might guess, Spirit’s share price has been quite volatile during this difficult period, with each twist in this sad story leading to big share price moves up and down, percentage-wise. Investors are betting on what happens next with each story update. This is a risky venture that is more like gambling than investing. Most investors probably shouldn’t get involved. The reason is quite simple: it seems that Spirit is flirting with bankruptcy. And that means there is a very real potential for a total loss for investors.
The latest move the company has made is further evidence of the problem. The company recently announced it will be cutting staff and selling aircraft to help improve liquidity. These are new planes that would be delivered to the company soon, which is a worrying development even as investors boosted the shares on the news. In fact, Spirit continues to hold on to an aging aircraft fleet so it can raise money, a move that will ultimately make Spirit a less attractive airline for consumers to fly. That says something about the problems the company is facing today.
In fact, these are the types of decisions made when a company has few good options. These are the types of decisions made when a company is struggling to avoid bankruptcy. These are the kinds of decisions that should worry investors, not get them excited about buying a stock.
Right now, it seems like Spirit is doing everything it can to survive so it can sell itself to another company. If these talks fail, the company appears likely to end up in bankruptcy court. Every potential suitor knows that, which is a major problem in getting a deal done. Operating from weakness is not a good outcome for Spirit or its shareholders. From a cynical point of view, a potential buyer could simply wait until bankruptcy presents itself and buy the company’s assets at a discount. It’s true that Spirit could win a Hail Mary pass, but the risks that would come from a fumble are so great that most investors should avoid what has become a big gamble.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
-
Amazon: If you had invested $1,000 when we doubled in 2010, you would have $22,292!*
-
Apple: If you had invested $1,000 when we doubled in 2008, you would have $42,169!*
-
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $407,758!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns October 28, 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 worth the gamble amid bankruptcy fears? was originally published by The Motley Fool
