Spirit Airlines (NYSE: SAVE) has taken investors on a tumultuous journey. Shares of the troubled discount airline have declined 93% in the past five years. During the same stretch, the S&P 500 will have more than double the money.
At the time of writing this, this airline stocks it is down 97% from the peak, which was established in December 2014. Is it time to take a chance and buy Spirit Shares?
Troubled spirits are hard to ignore
For stocks to do this, there are some serious problems with the business. And that’s exactly right here. This year alone has shone a bright light on the Spirit problem.
In January, the company proposed to join with JetBlue to make discount airlines stronger blocked. Spirit stock soared after the merger collapsed, and is down 83% this year alone. If regulators allow the transaction to happen, Spirit’s financial situation could improve due to the combination with JetBlue. Unfortunately, that didn’t happen.
Today’s corporate financial red flags are hard to ignore. For one, business is shrinking. Revenue through the first six months of 2024 was $2.5 billion, down 8.5% year-on-year. Management cited overcapacity in the industry as putting pressure on prices, as well as reduced prices on ancillary services.
Wall Street consensus analysts believe Spirit sales will drop 7.2% this year. It looks like the situation is going to get worse in the near future.
There is also a lot to be desired on the profit front. Roh has had problems with this in the past few years. The three-year operating loss widened to $360 million in the first half of 2024. Lower fuel costs were more than offset by higher salaries, landing fees, and aircraft leases.
Investors should be aware that Spirit’s financial performance is not indicative of the industry as a whole. The top airline in the US, Delta, Southwest, Unitedand Americanall reported positive revenue growth and operating income in the most recent quarter. Spirit sticks out like a sore thumb next to this airline.
Declining sales and continued losses, unsurprisingly, do not make for a good recipe for health balance sheet. Spirit is literally on the brink of fiscal insolvency, meaning there is a possibility that in the not too distant future it will struggle to pay its debts.
On June 30, the business has about $ 7 billion in debt and operating lease obligations on the books. That’s higher than the cash balance and cash equivalents of $725 million. This is not a good sign. Spirit may need to raise capital to finance operations.
Is Spirit stock a value trap?
To be clear, the fact that Spirit has fallen out of favor with investors means that the stock price could not be more depressed. It is trading at a price-to-sales ratio below 0.06, which is about the lowest level.
This is cheap. And it might entice deep value investors to take a chance on the stock. The bullish perspective is that revenue may start to stabilize and eventually grow again. And an increased top line can potentially help a business turn a profit, even if it’s small.
But based on recent trends, I’m not sure. Spirit is really hoping that its planned merger with JetBlue will go a long way in helping the business survive. Now, forced to fly solo, which highlights the rough shape of the company. It is best to avoid this stock like the plague.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines and Southwest Airlines. The Motley Fool has a disclosure policy.
Down 97%, Is It Time to Buy Spirit Airlines Shares? this was originally published by The Motley Fool
