Work on Models and a Few More Articles

It’s been a fairly busy month this month, as I work to improve my modeling ability.  I’ve been putting in quite a few hours working on financial models, mostly for major American airlines.  As part of this, I’ve also posted a few more articles on Seeking Alpha, and received generally positive feedback:

  1. After earnings, I believe Delta Air Lines is a strong investment.  Like Southwest, they have very little debt compared to others, such as American Airlines.  I currently see up-side of 16-30%, which makes it a “Buy,” although I’m still on the sidelines personally.
  2. Southwest Airlines is a good investment, in my eyes.  Their balance sheet is quite strong, with much less debt that their peers.  I think that their safety due to this means they can get away with their relatively low growth rate, and it’s a good value.
  3. Is WWE Ready for a Big Push?: in which I suggest the shares are priced a few dollars too high. I tend to think that vanity stocks such as WWE, where fans will purchase them to own them, trade a bit high.  I also don’t think growth prospects are as good as the company suggests, but time will tell.
  4. An article on William Hill. To me, the company looks a bit undervalued, although there is a specter of legislation changes in the UK related to their slot-like machines.  That’s potentially worrisome for the business.  There’s also some possibility of expansion in the US, which would be lucrative if it came to pass.

My goal for the remainder of the month is to publish a few more articles, and to prepare for earnings seasons.  I’d like to have models that I like in-hand prior to earnings releases for each company, and to be able to adjust those models on the fly in order to quickly interpret those earnings and forecasts for the future contained in them.  I’m also currently thinking up some other possible revenue streams from my work, as I’m quite enjoying it, and not currently eager to go back to law firm life.

Spirit Airlines: A Fast-Growing Airline with Little Debt

Spirit Airlines (SAVE) is a fast-growing value airline, which has sported an aggressive 11.7% revenue growth rate since 2011.  Spirit has continued this growth recently, with year over year revenue growth of 20% last quarter, from $621 million USD to $701 million.  What is driving this growth?  According to Spirit Airlines, this growth is led by an innovative fare structure, which charges lower up-front fees, but then adds a surcharge for everything from choosing a seat, taking a carry-on bag, and ordering a soft drink in flight.  These charges can be seen below, under “non-ticket revenue,” which is consistently nearly as high as ticket revenue.  While this might annoy some customers, it certainly hasn’t inhibited revenue growth.

Spirit Airlines Revenue and Profit Forecast 2017-09-22

Spirit also remains committed to growth.  Between 3Q16 and 2Q17, the company made a net income of $240 million, and in FY 2016, the company paid no dividend, and bought back $102.5 million of company stock.  Thus, the retention rate of Spirit Airlines is approximately 57%.  Combined with a Return on Capital of 16%, this should create 9.1% growth over the next five years.  Indeed, the company projects even higher growth than this, based on reducing the buybacks of company shares and continuing to pay no dividend, and instead reinvesting more earnings back into the company.  The above projection is based on a 9.1% growth rate, but the target price for Spirit Airlines could be much higher if better growth rates are attained.

Because of lower fare prices, Spirit may also be somewhat more resilient if economic conditions decline, as more consumers may look for lower-priced airlines, shying away from the large full-fee airlines, and even lower-cost offerings such as Southwest Airlines.  At the current price point, and with 9.1% growth forecast, Spirit Airlines appears to be correctly valued at this time.