Spirit Airlines: Citi Raises Price Target but Retains Sell Rating
Citigroup (Citi) has revised its assessment of Spirit Airlines, increasing the price target from $3.95 to $4.00. However, the company has maintained its Sell rating on the airline’s stock. Citi analysts note that Spirit Airlines is making progress in improving its operational cash flow, which is seen as a positive development.
Citi believes that Spirit Airlines’ recent filing of a mixed shelf registration could help stabilize the company’s financial situation. There is also speculation that the U.S. Treasury Department may purchase a small stake in the airline, which could be beneficial.
Despite these potentially favorable developments, Citi analysts caution that they may not necessarily translate into positive outcomes for current shareholders. Concerns are centered around the risks of equity dilution and the notion that the improvement in operational cash flow alone may not be enough to drive significant change.
It’s important to differentiate between potential government support for the airline and the implications for equity holders, as they are not the same. While the U.S. Treasury’s potential share purchase is seen as a positive for Spirit Airlines, it does not constitute a rescue for equity holders. This distinction is the basis for Citi’s decision to maintain its Sell rating on Spirit Airlines.
According to InvestingPro Insights, Spirit Airlines is facing significant financial challenges as it works towards recovery. The airline has a market capitalization of $728.03 million and a negative price-to-earnings (P/E) ratio of -1.62, highlighting the obstacles it must overcome. The adjusted P/E ratio for the last twelve months, as of Q4 2023, stands at -1.93, further underscoring the company’s struggles.
On the operational front, Spirit Airlines reported a gross profit margin of 15.51% over the last twelve months. While this indicates the company’s ability to manage costs relative to its revenues, it also has an operating income margin of -7.2%, suggesting that the company is currently not generating a profit from its operations.
InvestingPro Tips raise two significant concerns for investors interested in Spirit Airlines. Firstly, the company carries a substantial debt burden, potentially hindering its financial flexibility. Secondly, the airline is rapidly depleting its cash reserves, which could impact its ability to sustain operations without additional financing. Investors should consider these factors, especially in light of the mixed shelf registration and the potential for equity dilution.
Analyst comment
This news is neutral. Citi raised the price target for Spirit Airlines but maintained a sell rating due to concerns about equity dilution and the effectiveness of improved operational cash flow. The potential government support and mixed shelf registration may benefit the airline, but it does not guarantee positive outcomes for current shareholders. The market for Spirit Airlines is likely to remain challenging due to its significant financial struggles and negative financial metrics.
