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Spirit Airlines: Valuation of Equity

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

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  1. Spirit Airlines: Valuation of Equity Module 9 Carl Brinker March 24, 2014

  2. Agenda • Company Background • Estimating Value of an Equity Share • Analyst Reports • Adjusting for Date and Mid-Year • Sensitivity Analysis: Growth and WACC • Conclusions

  3. Company Background

  4. 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

  5. Estimating the Value of an Equity Share

  6. Value of an Equity Share Current Market Price (March 19): $62.41

  7. Analyst Reports

  8. 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!

  9. Analyst Reports Implied Compound Growth: 13.67% Target Price: $72.00

  10. 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

  11. Analyst Reports: Residual Income Growth Now, we can back into growth in residual income

  12. Analyst Reports: Residual Income Growth Growth in Residual Income: 3.90% We now can use this to back into Sales Growth

  13. 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

  14. Adjusting for Date and Mid-Year

  15. Adjusting for Date and Mid-Year

  16. Sensitivity Analysis: Perpetual Growth and WACC

  17. 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

  18. 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

  19. Questions?

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