Why Spirit Airlines Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Spirit Airlines (NAS: SAVE) fell as much as 17%, after the airline cut back guidance on revenue per available seat mile (RASM), a key metric in the industry, in its August traffic report.

So what: Spirit said that third quarter RASM would be down 2.5% to 4.5% for the third quarter, blaming the cut on the effects of Hurricane Isaac, as well as a federal excise tax holiday, which artificially inflated revenue in Q3 2011. Without these unusual items, CEO Ben Baldanza said, "RASM would have been up year-over-year."

The Wall Street brokerages didn't seem to buy the explanation, as Raymond James downgraded the stock to "market perform," and Dahlman Rose cut its price target.

Now what:Despite this setback, Spirit is still growing strongly, with an increase of 19% in Revenue Passenger Miles in August, and 17% year to date. Analysts are also expecting a 28% jump in sales this year, and 19% next year, with an even fatter increase in earnings per share. I don't see any long-term problems coming out of this release and, at a P/E of 11, this stock looks like a bargain right now. Dahlman Rose notably cut its price target to $23, indicating it still sees a healthy upside.

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The article Why Spirit Airlines Shares Dropped originally appeared on Fool.com.

Fool contributorJeremy Bowmanholds no positions in the companies in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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