Falling Oil Prices Will Boost This Airline’s Bottom Line

A renewed spike in global trade tensions and evidence that economic growth is slowing have combined to send the stock market tumbling over the past month or so. Airline stocks  have been caught in the downdraft.

In fact, this airline stock, which hit a recent peak near the $65 mark in late 2018, has since fallen more than 20% to around $50…

However, Spirit Airlines’ (NYSE:SAVE) position as a budget carrier targeting leisure travelers means that trade wars and slower global growth shouldn’t hurt it very much. Domestic consumer spending, a more relevant metric for Spirit, remains fairly strong. Moreover, the recent economic turmoil has caused oil prices to plunge, which will provide significant cost savings for airlines.

Spirit Airlines shareholders fear slowing growth

For each of its past two quarters, Spirit Airlines has posted strong unit revenue growth, enabling it to nearly double its earnings per share on a year-over-year basis. Spirit’s outlook for the current quarter isn’t too shabby, either. Analysts expect adjusted EPS to soar 48% to $1.64 this quarter. That would put the company’s EPS growth for the first half of the year at 60%.

Spirit Airlines will face tougher comparisons, though. In the first half of 2018, the carrier’s revenue per available seat mile (RASM) declined 4.6% year over year. By contrast, RASM returned to strong growth in the back half of the year, starting with a 5.5% increase in the third quarter.

As a result, the analyst consensus currently calls for EPS growth to slow to 22% next quarter: barely more than Spirit’s projected revenue growth of 15%. Analysts expect negligible earnings growth in the fourth quarter, when year-over-year comparisons will be the toughest.

Perhaps because of this projected slowdown in earnings growth, Spirit Airlines stock currently trades for a bargain valuation of less than nine times forward earnings. Yet the recent plunge in oil prices means that EPS growth may not slow as much as investors seem to fear…

Continue reading at THE MOTLEY FOOL

Leave a Reply

Your email address will not be published.