Spirit Airlines: Shares Could Use Upcoming Earnings To Break Out Of Consolidation

Individual Trader2020-10-15

SummaryAny significant improvement over EPS consensus of -$.2.70 in Q3 could result in shares breaking out.Book value continues to rise.Strond liquidity and cost reduction pushes us to a bullish near-...

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redhu
2020-10-21
redhu
说的很有道理，点赞。

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After that May bottom, shares went on a blistering rally for three weeks or so before finally topping out above $25 a share. Due to the size of that up-move in May/June, we can state with a high level of probability that the double bottom (reversal) pattern has now played itself out in full.  The question now is whether the consolidation we have seen in Spirit's share price will end up with shares breaking out to the upside or revisiting those lows we witnessed in March and May. The good thing about these consolidation patterns from a trader's standpoint is that we will have closure shortly. As we can see from the chart below, Spirit's share price will either break out above the down-cycle trend line or break below support (which would mean we have a descending triangle in play – bearish). At this stage, the bullish scenario looks more favourable as we have bullish divergences on the RSI momentum indicator and buying volume has been slowly creeping upwards since August. The play here though is to wait for this potential breakout as a solid breakout above that down-cycle trend line would significantly increase the probability of success on any respective long trade. \n Furthermore, there are further reasons why Spirit will most likely not revisit its March lows. For example, many airline stocks have had their earnings and balance sheets obliterated by the coronavirus-induced lockdowns this year. Although Spirit's earnings have obviously taken a hit due to the lack of demand, its balance sheet continues to go from strength to strength. In fact, there is more equity on the balance sheet now ($2.34 billion in its latest second quarter) than the $2.09 billion which was reported in the same quarter of 2 months prior. In June of last year, shares were trading well over $40 a share. Let that sink in for a bit. Shares are almost 3 times cheaper over that second quarter period last year but equity has risen well over 10%. These are exactly the type of conditions we look for when aiming to stack the odds in our favour as much as possible. Rising equity coupled with a much lower share price has resulted in Spirit's book multiple falling to 0.62. Spirit's average book multiple over the past five years comes in at 1.8 and the average in the sector comes in at 2.38. Suffice it to say, Spirit's assets have never been this cheap. It is fair to say that Spirit's financials were pretty solid coming into 2020. Its cost reduction initiatives definitely served the firm well coming into this “new normal.” Furthermore, if we are to follow Spirit's financial trends coming into 2020, EBIT hit $519 million and net income hit $335 million in fiscal 2019. Suffice it to say, management believes its focus on the leisure industry should mean the firm is one of the first airlines to start generating free cash flow once more.  Could the airline sector get worse before it gets better? Of course. An aggressive second wave of the virus could certainly make sentiment in the airline sector deteriorate even more from present levels. However, with new proposals concerning vaccines and testing, one feels it is only a matter of time before we see a recovery in this sector.\n In fact, with third quarter earnings numbers to be announced soon, it will be interesting to see whether shares use the binary event to break out above that down-cycle trend line. As we see from the implied volatility chart below, Spirit's implied volatility currently comes in at 86%. We would expect to see this number rise as we get closer to the earnings date which is at the end of this month. High levels of implied volatility enable the put seller, for example, to receive higher levels of premium for giving the right to sell or sell short the basket of shares to the respective put buyer. The higher premium one can receive means a lower overall cost basis can be achieved by the seller.  Source: Interactive Brokers Therefore, to sum up, shares of Spirit Airlines at present are trading well below book value but shareholders' equity has remained buoyant. Shares will soon enough break out to the upside or downside but we believe an upside breakout is more probable. We may look to put on something in here before earnings are announced at the back-end of this month.\n----------------------\nElevation Code's blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.\nJoin Us here\n-----------------------Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":301017182,"gmtCreate":1603290193546,"gmtModify":1703829416557,"author":{"id":"3458269085914905","authorId":"3458269085914905","authorIdStr":"3458269085914905","name":"redhu","avatar":"https://static.tigerbbs.com/adb180db8f9d3ca679e8ab39c89f5324","vip":1,"crmLevel":8,"crmLevelSwitch":0},"htmlText":"说的很有道理，点赞。","listText":"说的很有道理，点赞。","text":"说的很有道理，点赞。","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/301017182","repostId":2075311657,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":0,"commentSize":1,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.26.2","shortVersion":"4.26.2","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2075311657"}