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Spirit Airlines: Market Multiple Valuation

Spirit Airlines: Market Multiple Valuation. Module 3 Carl Brinker January 27, 2014. Agenda. Introduction to Spirit Airlines Market Multiples Calculations & Results Discussion of Reliability. Company Background. Company Background. Ultra-low cost carrier 2-star rating (lowest in USA)

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Spirit Airlines: Market Multiple Valuation

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  1. Spirit Airlines: Market Multiple Valuation Module 3 Carl Brinker January 27, 2014

  2. Agenda • Introduction to Spirit Airlines • Market Multiples Calculations & Results • Discussion of Reliability

  3. Company Background

  4. Company Background • Ultra-low cost carrier • 2-star rating (lowest in USA) • Hubs in Texas and Florida • Revenues of $1.3 billion (small carrier) • JetBlue: $4.9 billion • Delta: $35 billion • Initial Public Offering in June 2011 • Carries no long-term debt – unusual for industry

  5. Market Multiple Calculations

  6. Multiples: Comparable Data • Size differential is apparent (Spirit is far smaller than comparable firms) • Delta Airlines negative Comprehensive Income & Common S/H Equity • Are these the best firms for comparison? • Alaska Airlines, Frontier Airlines as potential additions

  7. Multiple: NEA Estimated Value: $13.28 / share Market Value: $47.92 / share Implied Action: Sell

  8. Multiplier: Book Value of Equity Estimated Value: -$23.86 Delta Airlines figure throws estimate – eliminate from analysis

  9. Multiplier: Book Value of Equity New Estimated Value: $15.08 Market Value: $47.92 Implied Action: Sell

  10. Multiple: EPAT As with Book Value of Equity, Delta Airlines is the clear outlier and will be eliminated

  11. Multiple: EPAT New Estimated Value: $43.56 Market Value: $47.92 Implied Action: Sell

  12. Multiple: Net Income New Estimated Value: $43.21 Market Value: $47.92 Implied Action: Sell Note: Delta Airlines did not need to be excluded, despite being thrown out in the EPAT multiple. This implies that Delta is comparable to other firms if we ignore Other Comprehensive Income

  13. Multiple: Available Seat Miles Estimated Value: $533.10 Market Value: $47.92 Implied Action: “Buy” Note that Spirit has nearly triple the Net Income per Available Seat Mile compared to other firms Estimated Value per Revenue Seat yields similar result ($480) This is a nonsensical result

  14. Multiples Summary All but one (nonsensical) multiples indicate overpricing, but are they reliable?

  15. Discussion of Reliability

  16. Are the Multiples Reliable? • Pros: • Consistency: all but one multiple returns the same recommendation • Potential: as a firm that is new to the stock market, hard data is difficult to come by and mispricing is more likely than for well-established firms • Cons: • Comparability: Spirit is far smaller than the other airlines – are they fundamentally different business models that should not be compared? • Stale Data: This analysis compared Spirit’s 2014 stock price to its 2012 year-end numbers • Variability: Multiples produced a wide variety of values

  17. Conclusion • Sell action is recommended, with reservation • Old data and variance in implied values presents substantial doubt as to the quality of multiple valuation for Spirit Airlines

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