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Spirit Airlines: Valuation of Equity. Module 9 Carl Brinker March 24, 2014. Agenda. Company Background Estimating Value of an Equity Share Analyst Reports Adjusting for Date and Mid-Year Sensitivity Analysis: Growth and WACC Conclusions. Company Background. Company Background.
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Spirit Airlines: Valuation of Equity Module 9 Carl Brinker March 24, 2014
Agenda • Company Background • Estimating Value of an Equity Share • Analyst Reports • Adjusting for Date and Mid-Year • Sensitivity Analysis: Growth and WACC • Conclusions
Company Background • Ultra-low cost carrier • 2-star rating (lowest in USA) • Hubs in Texas and Florida • Revenues of $1.3 billion (small carrier) • JetBlue: $4.9 billion • Delta: $35 billion • Initial Public Offering in June 2011 • Carries no long-term debt – unusual for industry • Known for controversies • Poor safety record & customer service ratings • Questionable advertising campaigns
Value of an Equity Share Current Market Price (March 19): $62.41
Analyst Reports • Data gathered from Value Line and Yahoo Finance • Yahoo Finance data not detailed and short-term • Longest forecast: 2015 • Following analysis is conducted on Value Line data Value Line is best!
Analyst Reports Implied Compound Growth: 13.67% Target Price: $72.00
Analyst Reports: Dividend Valuation Dividend Discount Model: PV Equity: $43.80 vs Market price of $62.41 The Dividend Model is useless: it’s 100% based on terminal value
Analyst Reports: Residual Income Growth Now, we can back into growth in residual income
Analyst Reports: Residual Income Growth Growth in Residual Income: 3.90% We now can use this to back into Sales Growth
Analyst Reports: Sales Growth • Implied Long-Run Sales Growth: 10.75% • Unrealistically high – I chose to stay with my rate of 2.5% • Airline industry growth with GDP – limited long-term growth
Sensitivity Analysis: Results • Beta ranged widely among sources, and perpetual growth • has a large impact on valuation • Blue = Sell • White = Buy • My recommendation: Hold or Tentative Sell
Conclusions • Recommendation: Hold or Tentative Sell • Analyst Reports indicate an extremely high growth rate • Likely that the 5-year horizon is not long enough to reach steady state • Findings are very sensitive to perpetual growth rate • and somewhat sensitive to WACC