I'm Still Convinced This Company Is a Dud

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Back in December 2011, I went searching for what I thought would be a great stock to short -- or bet against -- for this year. That company was ultra-discount airline  Spirit .

Since I entered that pick into my All-Star CAPS profile, it's actually beating the market by about 4 percentage points. Some might consider that a "win"; I don't. But the thing is, a single year is a pretty arbitrary timeline for an investment thesis to play out. Read below and see why I still think investing in Spirit is a mistake, and at the end, I'll offer up access to a special free report on The Motley Fool's Top Stock for 2013.

A quick review of the stock's performance
If we were to start tracking based on the beginning of the new year, here's how Spirit's stock has compared to the S&P 500's return.


SAVE Total Return Price Chart

SAVE Total Return Price data by YCharts.

As you can see, the company was flying high for a good portion of the year, only to take a precipitous 30% fall since early May.

Reviewing my thesis
In essence, the reason I'm not a big believer in this company is because it nickels-and-dimes customers at every corner, and I just don't think enough customers are willing to have such unpleasant experiences on a repeated basis.

As I wrote last year: Round-trip, you have to pay up to $80 for carry-ons, having an agent print your boarding pass will end up costing you $5 per pass, picking your seats can cost you up to $20, and you even have to pay $3 for water on board (but, of course, the salty pretzels that you get are free).

On top of that, the average amount of room between where your knees go and the seat in front of you is a paltry 28 inches, or almost 20% less than the next-most-cramped airline.

Of course, investors in Spirit will point to the company's balance sheet to explain why it has a bright future. Compared to the rest of the industry, it may appear that they have a point.

Company

Total Cash

Total Debt

3-Year Revenue Growth

3-Year Net Income Growth

Spirit

$399 million

$0 

21.77% 

10.5% 

US Air

$2.4 billion

$4.6 billion 

8.74%

N/A 

Southwest

$3.2 billion

$3.2 billion 

17.4%

N/A 

United Continental

$6.7 billion

$12.2 billion 

29.9%

N/A 

Delta

$3.2 billion

$13.1 billion 

8.8%

N/A 

JetBlue 

$1.1 billion

$3.7 billion 

13.7%

N/A 

Source: SEC filings, Yahoo! Finance, Fool.com.  N/A = not applicable, because company was not profitable over the given time frame.

Just looking at that last column alone might make you think that Spirit would be a great investment. And I wouldn't blame you for thinking that. But a closer look at how the company makes its money shows an alarming trend.

Usually, the bulk of income for an airline is through the sale of tickets -- though charging for checked bags has become an increasingly greater portion of revenues across the board as well. But as I stated above, Spirit charges for much more than checked bags, and all of those add-ons have become an increasingly bigger slice of the revenue pie.

anImage

Source: SEC filings. 2012 numbers are for the first nine months of the year.

What was once a 10% slice of the revenue pie now accounts for 40% of all money coming in. You might think the ability to grow this number means people don't mind the nickel-and-diming. I would argue that there's just still a lot of people left to dupe.

Remember, Spirit is still growing its base of operations and destinations. I firmly believe that if the company's business practices continue as such, markets that the company moves into will boom, and then fall off significantly.

In fact, it's already started to happen. The average revenue brought in by passenger tickets divided by the total number of flight segments is down 6.8% over the first nine months of 2012.

And customers are voicing their displeasure with the airline. Skytrax, which bills itself as having the world's largest airline review site, offers telling evidence. Here's the average rating of customer satisfaction for the following airlines.

Airline

Customer Review Rating (out of 10)

Southwest

8

JetBlue

7.5

United Continental

5.5

Delta

5

US Airways

3

Spirit

2

Source: Skytrax. 

Clearly, I think that given enough time, Spirit and its stock will sink to a more fitting place in the stock market: toward the bottom.

For better ideas in the year ahead, we have just the thing for you.  The Motley Fool's chief investment officer has selected his No. 1 stock for the next year.

Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

The article I'm Still Convinced This Company Is a Dud originally appeared on Fool.com.

Fool contributor Brian Stoffel has no positions in the stocks mentioned above. The Motley Fool owns shares of Spirit Airlines. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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