Warren Buffett, in his 1989 letter, said that the cost of thumb sucking had been huge for his shareholders. In the middle of December 2012, I wrote about Spirit Airlines Incorporated (NASDAQ:SAVE) and suggested that the market significantly undervalued the business at that time. Even after writing an article, I sat still and did not buy into this airline. Since then, Spirit Airlines Incorporated (NASDAQ:SAVE) has jumped by nearly 52%, from $17.14 per share to nearly $26 per share, in a period of just more than three months.
The best performer and the most profitable airline
Since the beginning of 2013, Spirit Airlines could be considered the best performer on the market among its peers including Alaska Air Group, Inc. (NYSE:ALK) and Southwest Airlines Co. (NYSE:LUV).
While Spirit Airlines Incorporated (NASDAQ:SAVE) have gained nearly 44.4% since the beginning of the year, Alaska Air and Southwest Airlines Co. (NYSE:LUV) advanced by around 38.6% and 20.7%, respectively. I personally think Spirit Airlines deserves that, due to its superior performance over the other two airlines.
| Operating margin (%) | D/E | ROIC (%) | EV/EBITDA | |
|---|---|---|---|---|
| Alaska Air Group, Inc. (NYSE:ALK) | 12.63 | 0.6 | 11.2 | 4.77 |
| Southwest Airlines Co (NYSE:LUV) | 4.72 | 0.5 | 3.25 | 5.57 |
| Spirit Airlines Incorporated (NASDAQ:SAVE) | 13.15 | N/A | 20.7 | 7.42 |
Among the three, we can clearly see that Spirit Airlines is the most profitable airline with the highest operating margin of 13.15% and also the highest return on invested capital of more than 20%. Alaska Air ranks second with a 12.63% operating margin and more than 11% return on invested capital. From the table above, investors would not be impressed with the Southwest Airlines’ operating performance. Southwest Airlines Co. (NYSE:LUV) generates the lowest operating margin at 4.72% and also the lowest return on invested capital of only 3.25%. Interestingly, while Alaska Air and Southwest Airlines Co. (NYSE:LUV) employed some debt in their operations, Spirit Airlines has a debt-free operation. As of December 2012, it had $583 million in total stockholders’ equity, $417 million in cash and no debt.
Ultra-low cost strategy, focusing on non-ticket revenue
Indeed, in order to generate high operating margin, Spirit Airlines Incorporated (NASDAQ:SAVE) has adopted an ultra-low cost strategy for its passengers in 48 airports in different areas including the U.S., the Caribbean and Latin American regions. As Warren Buffett mentioned several decades ago, the airline business is actually a commodity business, where customers rush to airlines, which offer the lowest airfares, regardless of airline brand. Because of the low cost strategy, Spirit Airlines has managed to consistently generate positive net income since 2008, even in the period of high volatility in fuel prices and global economic recession. In the past five years, its net income has grown from $33 million in 2008 to more than $108 million in 2012, marking an incredible annualized growth of 26.8%.
What makes me interested is the huge growth in its non-ticket revenue over time. While its passenger revenue increased from $657.5 million in 2008 to only $782.8 million in 2012, its non-ticket revenue jumped from nearly $130 million to $535.6 million during the same period. Indeed, that is smart strategy to focus on non-ticket revenue growth as Spirit Airlines could reduce its airfares lower.
At $26 per share, Spirit Airlines is worth nearly $1.9 billion on the market. The valuation has moved up significantly higher than when I first wrote bout it, at 7.42 times EV/EBITDA, whereas the EV multiple of Southwest Airlines Co. (NYSE:LUV) is nearly 5.6. Alaska Air has the lowest valuation at only 4.77 times EV/EBITDA.
My Foolish take
Personally, I am still bullish on Spirit Airlines in a long run. If Spirit Airlines kept going forward nicely with its ultra low cost strategy, I would expect to see Spirit Airlines Incorporated (NASDAQ:SAVE) move higher in the next several years. Alaska Air, with a decent operating margin and low valuation, is a decent pick as well.
The article A Good Ultra-Low Cost Airline Stock originally appeared on Fool.com and is written by Anh HOANG.
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