1 / 18

Spirit Airlines: Simple Forecasting & FCF Valuation

Spirit Airlines: Simple Forecasting & FCF Valuation. Modules 4 & 5 Carl Brinker February 5, 2014. Agenda. Introduction to Spirit Airlines Mod 4: Simple Analysis Calculation Overviews Analysis Mod 5: Valuation using Free Cash Flows Calculation Overview Analysis. Company Background.

roy
Télécharger la présentation

Spirit Airlines: Simple Forecasting & FCF Valuation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Spirit Airlines: Simple Forecasting & FCF Valuation Modules 4 & 5 Carl Brinker February 5, 2014

  2. Agenda • Introduction to Spirit Airlines • Mod 4: Simple Analysis • Calculation Overviews • Analysis • Mod 5: Valuation using Free Cash Flows • Calculation Overview • Analysis

  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 • Known for controversies • Poor safety record & customer service ratings • Questionable advertising campaigns

  5. Module 4: Simple Forecasting

  6. NEA, EPAT & Sales Actuals • 2013 Numbers from Q3’13 • EPAT & sales extrapolated to year-end; sales estimated through year- • over-year growth from Q3’12 • Volatile changes in NEA and EPAT • What happened in 2010 and 2011? • NEA: IPO led to restructuring of the firm • (eliminated all debt, increased cash, increased tax • & other liabilities) • EPAT: 2010 inflated by large negative tax provision

  7. RNEA, EPM & EATO Actuals Relatively flat EPM & EATO growth indicate consistent efficiency year-over-year

  8. Comparables • Takeaway: are these • really comparable? • Business life cycle • Size • Exclusion from analysis

  9. Assumptions EPM: 68.35% (Average 2011-2013) EATO: 7.43 (Average 2011-2013) Sales Growth: 15% (Avg: 23%)

  10. Why Set Sales Growth So Low? • Unrealistic to grow 23% year-over-year in an intensely competitive, low-growth industry • Recent IPO granted the firm a one-time increase in resources (aka Cash) for reinvestment and growth

  11. Projections: NEA, EPAT & Sales Assumptions: EPM: 68.35% (Average 2011-2013) EATO: 7.43 (Average 2011-2013) Sales Growth: 15% (Avg: 23%)

  12. Simple Forecasting: Analysis • Enterprise Profit Margin • Likely to change dramatically in the next five years as the company grows and stabilizes • Enterprise Asset Turnover • As presented, EATO is calculated using Balance Sheet numbers • Off-balance sheet plane leases comprise a significant portion of Spirit’s operating assets, though these are not included in EATO • Volatility • The airline industry is historically susceptible to macroeconomic phenomena

  13. Module 5: Valuation Using Cash Flows

  14. FCF: Model & Assumptions Fundamental Identity: Free Cash Flows = EPAT – Change in NEA Assumptions:

  15. FCF: Assumptions Module 4 Assumed in Module 5 • Perpetual Sales Growth: Why 7%? • Similar argument to lowered 5-year sales growth • Industry factors, young firm, one-time cash source from IPO

  16. FCF: Valuation Results FCF valuation indicates that Spirit is dramatically undervalued, even with conservative sales revenue growth assumptions.

  17. FCF: Analysis & Conclusions • FCF is likely not an accurate or appropriate measure of Spirit Airlines • Given lowered revenue growth estimates, the model still estimates Spirit at Double its current enterprise value • Implications: • FCF valuation is reliant on assessment of cash flow size, timing and risk • Investors likely see Spirit’s dramatic revenue and FCF growth as temporary (size will not grow linearly over time) • Investors also may see Spirit as a risky investment due to its small size (i.e. apply a discount rate in excess of 10%)

  18. Questions?

More Related