Spirit 4Q23: Beginning of the Turnaround?

Current performance and near-term outlook remains weak, but management has changed tone and presented a credible turnaround scenario, promising a return to profitability much sooner than feared.

Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.

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As you may remember, I made a pretty big call in January that the crash of SAVE 0.00%↑ following the court decision against their merger with JBLU 0.00%↑ was an overreaction. At that time, the stock price was $6 and bears could not contain their exuberance about an incoming bankruptcy spiral. The stock did indeed fall further to as low as $4. But then we got a bit of a relief rally. As of this writing it is sitting at $7.

Catch the Spirit?

As a reminder here is a quick recap of my bull case:

1. Bankruptcy fears in light of looming debt maturities are overblown as the company has many levers to pull. If they choose to liquidate, the proceeds would very likely exceed their current market cap $600m. They have $1bn in equity book value, all of which is tangible. They also have a lot of off-balance sheet assets to monetize such as their airport concessions.

2. The M&A scenario is also not completely off the table, whether it’s with jetBlue or another partner. Courts can be appeased with more forthcoming divestiture plans. The present value of the expected synergies would likely be multiples of Spirit’s current market cap and its shareholders would likely get a large chunk of that in a deal.

3. The business also has a lot of potential to restructure. Spirit has grown too fast. They can shrink back or at least slow down to financial health by focusing on profitable routes. Economies of scale are important without doubt. But Spirit has proven before 2020 that they can operate a ULCC business model very profitably and Allegiant is proving this still today at half Spirit’s size.

Today’s earnings release was important because it provided much needed clarity on the third pillar of the bull case above. I was obviously hoping for actual operating improvements in Q4. But more importantly, I was looking for a forceful and credible positive sentiment shift in management’s commentary about the company’s prospects to return to financial health on their own.

While actual results were not great, I absolutely think we got support on the latter for this bull case. Let’s dive in.

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TLDR Summary

• The company’s operating performance was weak without doubt. But that’s not breaking news. It’s expected for a company that is dealing with bankruptcy speculation and that is priced as such. What matters more is whether there is a credible turnaround scenario beyond merely consuming merger arbitrage hopium.

• Management issued a cautious near-term guidance for Q1 with continued large operating losses. However, they expect a meaningful improvement during Q2 to Q4 driven by a recovery in the domestic airline industry and benefits from their restructuring program. In fact, they promised return for profitability and positive cash flow generation this year. They obviously still have to deliver on it, but this would be much sooner than consensus opinion which forecasts negative earnings per share all the way to 2026, the last year estimates are available.

• I expect a meaningful shift in the narrative over the coming months. Management’s commentary will likely improve analyst sentiment which has the potential to help the stock to rebound. This stock would be trading at $10 if it was valued at its book value which would be consistent with Allegiant, its closest peer.

• In the long run, there may be a lot of upside for both. Historically, airline stocks have traded at about 2x their book value to reflect the value of their off-balance sheet assets, like their operations and their brand. The industry is hurting right now. Part of my bet is that this pain is more cyclical in nature than what many believe. By the end of this year, we will know more.