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Here's Why You Should Retain Spirit Airlines (SAVE) for Now

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Spirit Airlines (SAVE - Free Report) is benefiting from improvement in air-travel demand as vaccinations increase and coronavirus-led restrictions ease in the United States. With uptick in demand, the airline is gradually adding back capacity. The carrier anticipates its second-quarter capacity to be down only about 5.5% from the comparable period in 2019 (pre-coronavirus). For 2021, it predicts the same to be nearly flat compared with the 2019 levels. This increase in capacity is expected to boost revenues for the company.

With continued recovery in air-travel demand, Spirit Airlines expects to reach positive EBITDA territory by the second quarter. Moreover, it hopes to generate positive earnings per share this summer. Further, the company expects to achieve positive adjusted EBITDA margin for the full year.

Additionally, reduced costs due to coronavirus-led shrinkage in operations are aiding the company’s bottom line. Total operating expenses declined 30.4% year over year in 2020 due to reduction in aircraft fuel expenses and costs associated with maintenance, materials and repairs. The same dropped 32% year over year in the first quarter of 2021.

The airline’s sound liquidity position provides a cushion against coronavirus-led adversities. The carrier exited the first quarter with cash and cash equivalents of $1,945 million, above the current debt of $357 million, implying that the company has sufficient cash to meet its current debt obligations. Moreover, the company received $184.5 million during the first quarter under the Payroll Support Program 2 (PSP2). It will receive additional funds of approximately $28 million under PSP2 in the second quarter, which would further bolster its liquidity. The carrier is also expected to receive around $198 million in the current quarter under PSP3.

Due to optimism surrounding the improvement in air-travel demand, shares of the company have rallied 51% in the past six months, significantly outperforming the industry’s 13.2% increase in the period.


 

Given the uneven recovery, air-travel demand might still take a while to bounce back to pre-pandemic levels. However, Spirit Airlines seems well positioned to tackle the challenges, owing to its healthy liquidity position and cost-control measures. Additionally, with leisure travel demand continually improving, the company is expected to see higher passenger demand this summer. In light of these positives, we believe investors should hold on to the Spirit Airlines stock for now, as is suggested by its Zacks Rank #3 (Hold).

Key Picks

Some better-ranked stocks in the broader Transportation sector are ArcBest Corporation (ARCB - Free Report) , C.H. Robinson Worldwide (CHRW - Free Report) and United Parcel Service (UPS - Free Report) . While C.H. Robinson sports a Zacks Rank #1 (Strong Buy), ArcBest and UPS carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of ArcBest, C.H. Robinson and UPS have rallied more than 200%, 24% and 100% in a year’s time, respectively.

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