Warren Buffett Should Love Spirit Airlines!
NEW YORK ( TheStreet) -- Spirit Airlines
It always fares poorly in customer satisfaction surveys. When "I hate Spirit Airlines" is Googled with no quotes, there are 821,000 entries returned in 0.30 of a second. There is even a " Boycott Spirit Airlines" Facebook page for the haters (with over 36,000 "likes" -- how ironic). But if anyone should love Spirit Airlines as an investment, it is Warren Buffett.
There are many reasons why "The Oracle of Omaha" should be showing Spirit Airlines the love. Spirit has all the attributes that Buffett finds appealing for an investment.
Warren Buffett favors the best-performing company in a sector, which has great management. Spirit Airlines has a profit margin is 9.80%, compared to the industry average of 0.03%. Southwest Airlines
Not having any debt should help Spirit Airlines maintain that superior profit margin.
The industry average is a debt-to-equity ratio of 3.41 with United Continental at 6.98, U.S. Airways having one of 3.93 and 0.45 for Southwest Airlines.
Buffett avoids debt, once noting in a shareholders letter that, "Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage. It seems to us both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant."
What Buffett does seek in a company is an economic moat, as he stated in a letter to shareholders long ago: "A truly great business must have an enduring 'moat' that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business 'castle' that is earning high returns."
Spirit's unique position as the dominant deep-discount carrier results in the economic moat that Buffett seeks. If the economy improves, Spirit Airlines will benefit from more flying and more expensive tickets.
Should the economy sputter, the cheap airfares of Spirit Airlines serves as its economic moat. As CEO Ben Baldanza stated in a CBS " Morning News" interview earlier this year, "What we say is what we care about is what our customers care about, which is price... but the total price that customers pay on Spirit Airlines is less than they pay on anyone else and that's why they love us."
In its "protecting excellent returns on invested capital," Spirit Airlines has a return-on-assets of 13.60%.The industry average is 2.50%. It is twice that at 5% for US Airways ( whose merger with American was just approved ). Southwest Airlines has a return-on-assets of 3.20%. For United Continental, it is a negative 0.50%.