A Spirit Deal Is Finally Here. Why J.P. Morgan Says Sell the Stock.
JetBlue reached a deal to purchase Spirit on Thursday, but while that company prepares to buy
for $33.50 a share, J.P. Morgan says investors should be selling the stock.
Analyst Jamie Baker turned from bull to bear Friday, downgrading Spirit Airlines (ticker: SAVE) to Underweight from Overweight, while shaving $1 off his price target, to $29. “From here, significant patience is required,” he warned.
That is because while yesterday’s news was the long-awaited end of a “drama-filled road” to a merger, Baker thinks it is unlikely we will get any news on the regulatory front until early next year at best. (Recall that antitrust concerns have dogged any potential deal, with either
[ULCC] from the start.) So while he thinks there is a 70% chance of a deal getting done, he doesn’t expect we will get confirmation until early 2023 at best.
The problem is that a lot else could happen between now and then for the airline industry, particularly given worries that consumer spending is heading for a fall.
Baker’s prior bullishness on the stock stemmed from the fact that a deal insulated Spirit from the problems plaguing its peers’ shares, from high fuel costs to labor shortages, and indeed Spirit stock—up more than 17% in 2022—has handily outperformed its airline rivals and the broader market. In the months leading up to regulatory approval (or not), the stock will likely remain insulated, he said, “with the difference being the deal announcement and subsequent rally now lie behind us, rather than ahead.”
The fact that Spirit may be removed from the industry’s trends could actually be a hindrance, he warned, “since as of today it turns out the industry is proving to be profitable in a U.S. recession, albeit a mild one thus far, but nonetheless a feat never achieved in modern history).”
Moreover, he noted that the stock’s performance means that any investor who bought Spirit since Frontier’s original offer is very likely in the black—and now is the time to lock in that gain. “Given the tumultuous nature of trading airline stocks, our recommendation is that profits be taken.”
At least some investors are taking that advice today, with Spirit off 2% to $25.15 in recent trading.
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