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Spirit Airlines: Full-Information Forecasting. Module 13 Carl Brinker April 22, 2014. Agenda. Final Valuation: Overview Valuations Models Comparison Across Models Mid-Year and Date Adjustments Examples of Forecasting I/S: Hedging settlements B/S: Capitalized Interest
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Spirit Airlines: Full-Information Forecasting Module 13 Carl Brinker April 22, 2014
Agenda • Final Valuation: Overview • Valuations Models • Comparison Across Models • Mid-Year and Date Adjustments • Examples of Forecasting • I/S: Hedging settlements • B/S: Capitalized Interest • Difficulties and Observations • Effect of Off-Balance Sheet Leasing • Sensitivity Analysis • Conclusion: Buy/Sell Order
Valuation Results • Value of Enterprise: $2.983 Billion • Value of Equity: $2.389 Billion • Market Cap: $4.159 Billion • Per share (forecasted): $32.18 • Per share (actual): $56.03 Conclusion: Spirit is overvalued (sell). This is likely due to overly-optomistic shareholders expecting high growth in the long term.
Free Cash Flow Model Value: $2.792 Billion Market Value: $4.752 Billion
Residual Income Model Value: $2.792 Billion Market Value: $4.752 Billion
Abnormal Earnings Growth Model Value: $2.792 Billion Market Value: $4.752 Billion
Comparing the Three Models • All models result in identical valuation • AGR Model provides the highest explanatory power within the forecasting horizon
Forecasting: Overview • General methodology: • Calculate balances as percentages and identify trends over time • Extrapolate these trends using 10-K disclosures, logic and judgment • Calculate EPAT, FEAT, NEA, and NFL from resulting projections • Use these numbers as inputs for the valuation models • Generally, Spirit discloses very little information in its notes and to the public at large. This made forecasting accounts somewhat difficult.
Forecasting: Income Statement • The vast majority of expenses grow with sales • Some exceptions: • Hedging settlements • Mark-to-Market gains and losses • Special charges
Forecasting: Income Statement 2012 2013 • How should we forecast settlements on derivatives? • Theoretically, derivatives will deliver no gain or loss in the long-run: point estimate is zero • In addition, Spirit stopped all hedging activities after 12/31/13 as indicated in its earnings conference call and 10-K
Forecasting: Income Statement 2012 2013 2014 2021 2022 Hedging settlement gains/losses are set at 0% of sales (for 0 expense) Middle forecast years omitted for easy presentation
Forecasting: Balance Sheet Year-over-year trend analysis used for forecasts Example of unusual item: Capitalized Interest 2011 2012 2013
Forecasting: Balance Sheet • Spirit incurred capitalized interest on plane loans as a young company. It paid some of that off in recent years. • Forecast: Spirit will pay those off in a short period of time
Forecasting: Results Steady state achieved here We did it!
Off-Balance Sheet Leasing • 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 Adding leases reduces EATO (NEA increases) and subsequently reduces the value of the firm. The market appears to ignore off-balance sheet leasing.
Sensitivity Analysis Majority of sensitivity analysis values come back below market value Value is heavily dependent upon perpetual growth rate and notas sensitive to WACC.
