1 / 29

Spirit Airlines: Not On Board with Valuation

Spirit Airlines: Not On Board with Valuation . Carl Brinker, Laura Conti, Ashlee Hunt, and Michelle Kelly. Agenda. How the Industry Operates. Revenues Passengers, Mail, Cargo, Services Structure Major, National, Regional, Charter Fares Variable pricing, Price wars Costs

hedva
Download Presentation

Spirit Airlines: Not On Board with Valuation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Spirit Airlines: Not On Board with Valuation Carl Brinker, Laura Conti, Ashlee Hunt, and Michelle Kelly

  2. Agenda

  3. How the Industry Operates • Revenues • Passengers, Mail, Cargo, Services • Structure • Major, National, Regional, Charter • Fares • Variable pricing, Price wars • Costs • Fuel, Labor, Equipment

  4. Revenue and Profit by Company

  5. Number of Destinations

  6. Market Capitalization by Company

  7. Final Valuation and Recommendation by Company Market Cap Valuation Buy/Sell

  8. Why do airlines hedge for fuel?

  9. Southwest and JetBlue • Hedge for risk in fluctuation of fuel cost • Very common and usual practice for airlines

  10. Delta Airlines • Stopped hedging for fuel • Delta Airlines purchased a refinery • Has an agreement with Phillips 66 • Any non-jet fuel products that are produced will be traded with Phillips 66 for jet fuel

  11. Spirit Airlines • Spirit stopped hedging for fuel • Currently has zero hedges • Very difficult to predict expenses when fuel prices are so volatile • Considering buying risk insurance • Problem with risk insurance: constant expense paid out each year • Hedging ideally results in zero gains or losses

  12. Lack of Hedging • Clearly shocked analysts • “And oh my gosh, did you guys stop hedging fuel too?” • Extremely risky • Adding to risk: one supplier

  13. Spirit Operating Leases

  14. Operating Leases • Market Cap: $4.159 billion • Equity value before off-balance sheet leases: $3.584 billion • Equity value after off-balance sheet leases: $2.389 billion • Change: (33.34%)

  15. Southwest

  16. Delta

  17. JetBlue

  18. The Problem with Spirit… • Capital Leases are not the same type of asset or have a similar duration • Therefore IRR is not a true reflection of operating lease risk

  19. What about alternatives? • Spirit has no debt on its balance sheet. • No RNFL • No credit rating • Difficult to find comparable firms

  20. Operating Leases • Comparison: • JetBlue: 5.25% • Delta: 12.74% • Southwest: 5.34%

  21. Operating Leases • Current Market Cap: $4,159 • Current Stock Price: $58.65

  22. WACC Problems Our calculations gave the same result… What’s going on!? Let’s look at two assumptions for Spirit: Beta and Cost of Debt

  23. WACC Problems: Beta Deriving cost of equity requires an estimate of Beta To get Beta, we evaluate Spirit’s volatility compared to the market over a long time period. The main problem: Spirit’s IPO was in 2011…we’re using less than 3 years of data!

  24. WACC Problems: Beta Spirit Airlines S&P 500 The math checks out…but does this really make sense?

  25. WACC Problems: Beta Of course it doesn’t! The S&P rebounded from recessionduring 2011-2014. We don’t have time series data…what about other comparables? …nothing useful here. Used calculated Beta. Note: Increasing Beta would further decrease Spirit’s value!

  26. WACC Problems: Cost of Debt

  27. WACC Problems: Cost of Debt How far off are we again? The Results: Sensible trend, but highly unreliablefigures and a key assumption

  28. Conclusion • Spirit is difficult to value for several reasons: • Few disclosures • Unique business model (no debt, no hedging) • Young company (no time series data) • No truly comparable firms • We are not confident in Spirit’s valuation, though all signs point to it being overvalued (despite analyst recommendations to buy).

  29. Any Questions?

More Related