Spirit Airlines, Inc.(SAVE)

A Strong Buying Opportunity

Kane Chan and Ben Kelley Materials and Industrials

Investment Thesis ● Unique business structure + strong fundamentals = extremely competitive

against much larger airline companies ● Tremendous opportunities for growth● Relative valuation distorted by industry undervaluation and Spirit’s capacity

expansion○ DCF based intrinsic valuation supports this

Management and History● Founded as a trucking and air cargo company in 1964● Passenger airline started in 1980

● Robert L. Fornaro: CEO and President○ 35 years of experience in airline consulting industry ○ Oversaw 7-fold increase in revenue during tenure at AirTran

● John Bendoraitis: Senior VP and COO○ 30 years of industry experience ○ Worked way up from aircraft technician to VP of maintenance ops

● Ted Christie: CFO ○ 20+ years of experience ○ Experience with Frontier Airlines and cost restructuring with ULCC’s

Today

Basic Information ● Current Price: $47.82● 52wk Range: 32.73 - 53.53● Market Cap: 3.32B● P/E: 11.06● Beta: .47

Ticker Symbol: SAVE

Company Profile

Company Profile

Growth Opportunities ● # markets currently served = 208

○ # planned new markets over next 5 years = 125○ # markets with mid-teen + operating margin >500

● Strong CF, high liquidity, and CAGR of 15-20% position SAVE to capture more underutilized markets

● Diversifying into smaller markets = little or no direct competition○ Routes like: Akron-Canton, 4+ Florida destinations, Las Vegas-Myrtle Beach, Orlando-Niagara

Falls, etc.

Risks

-Fluctuating oil prices

-Competitive pricing environment

-Cyclical nature of industry

-Temporary margin and free cash flow erosion due to growth investments

Industry and Relative Valuation● Entire Airline industry is

cheap right now○ Driven by stagnant

price action despite increased earnings

● Spirit maintains a Margin advantage

○ 21.76% vs 17.4% industry Op. Margin

● Period of heavy investment for Spirit further distorts relative valuation

Valuation - DCF

Avg Analyst Price Target: 55.25, 15.8% Upside

Our Price Target: 20% Upside

Bear Case ($41.02): 14% downsideBase Case ($57.72): 20% upsideBull Case ($78.96): 65% upside

Key assumptions:-Adjusted EBIT margins flat at 23-24%-Discount rate of 10% (Bloomberg had 8.70%)

Conclusion

● High price and margin competitveness ○ Durable moat due to business model

● Growth and expansion opportunities ● Strong upside

○ Base Case: +20% upside

● Recommendation: BUY

Questions?