Just like airplanes take off and land, shares of Spirit Airlines (SAVEQ -6.10%) have taken shareholders on a ride. Only in this instance, there has been ridiculous amounts of turbulence on the journey.
The business has made for a terrible investment. This airline stock currently trades 98% off its all-time high, a milestone that was achieved nearly 10 years ago. At this beaten-down level, is it time to buy Spirit Airlines?
Up and down
Things briefly reversed course recently. From Oct. 18 to Nov. 11, shares of the troubled airline surged 131% higher. The company initially gave shareholders a sigh of relief when it said it was able to secure an extension with bondholders to refinance its debt.
Earlier this year, Spirit Airlines' planned merger with JetBlue Airways was called off by a federal judge due to concerns that it would've lowered competition at the lower end of the airline industry. The stock tanked tremendously after the announcement.
There was hope that a new deal was in the works, adding to Spirit shares' recent short-lived bounce-back. The business was in talks recently with Frontier Group about a possible merger. But the discussions fell through.
This puts Spirit Airlines in a precarious situation. The company is expected to file for bankruptcy protection in the not-too-distant future. It has also revealed that it won't be able to file its Q3 2024 10-Q on time.
Value trap
Investors might have been encouraged by the market's renewed sense of optimism toward Spirit Airlines, but that has dissipated. I believe it's still extremely difficult to be bullish on the business or the stock, even though the shares trade at a dirt-cheap price-to-sales multiple of 0.03. In my view, this is a classic value trap. But that valuation shows just how much the market has soured on Spirit's prospects.
The challenges are hard to ignore. For starters, the company is struggling to grow its revenue. Sales totaled under $1.3 billion in Q2 (ended June 30), down 10.6% year over year. This was the fourth straight quarter of a year-over-year top-line decline.
"Significant industry capacity increases together with ancillary pricing changes" were called out by the management team as key factors pressuring the top line. Spirit's strategy centers on charging travelers for various non-fare items, like seat selection, baggage, or food and beverage. But the competitive nature of the industry has forced the company to cut prices here.
In the last six months, Spirit Airlines posted $359.8 million in cumulative operating losses. This isn't a new development. In fact, the company hasn't reported positive operating income for a full year since 2019. That's a very troubling trend that clearly highlights the company's financial woes.
Spirit's sales declines and operating losses stand out in the airline industry. The top four airlines, Delta, American, United, and Southwest, all reported a revenue gain and positive operating income in their latest respective quarters.
The balance sheet also leaves much to be desired. As of June 30, Spirit Airlines carried a gut-wrenching $3.3 billion in long-term debt, which is more than 20 times greater than the current market cap. Given the company's issues with achieving profitability, debtors are rightfully worried about Spirit's ability to pay its obligations.
Perhaps a tie-up with Frontier, if it was successful and went through, would've created a new and improved airline with a much better financial situation and growth trajectory. But this is no longer on the table. And any future merger discussions with other suitors are hard to predict ahead of time. As a result, investors should stay far away from this troubled stock, no matter how cheap it is right now.
