Spirit Airlines (SAVE 0.59%) stock was falling again this week. The discount airliner officially canceled its merger with JetBlue Airways and looks to be in a desperate situation financially. The stock has fallen over 20% this week and is down around 70% year to date, according to data from S&P Global Market Intelligence.
Here’s why Spirit Airlines stock fell this week, and where investors go from here.
No merger and a perilous balance sheet
Until recently, investors thought Spirit was going to merge with competitor JetBlue. But the companies’ proposed merger got shot down on anticompetitive grounds. Spirit was then left out to dry after multiple years of planning for this business combination.
This week, JetBlue officially announced it would not pursue any appeal to consummate the Spirit merger, leaving Spirit shareholders and management on their own. Spirit stock subsequently fell by more than 20% as investors get more and more pessimistic about its prospects. And they would be right to have this pessimism: Spirit is in a terrible financial position.
The company’s balance sheet is ugly, with $316 million in short-term debt, $3 billion in long-term debt, and over $3 billion in operating lease liabilities. It has less than $1 billion in cash on the balance sheet and is burning over $500 million in free cash flow each year. It is no surprise then to see the Spirit Airlines bondholders planning what to do if the company files for bankruptcy.
Is the stock a buy?
You might think a stock down 70% is a good “buy the dip” candidate. But that couldn’t be further from the truth with Spirit. The company may be heading for bankruptcy shortly, which would wipe out 100% of the equity value. A stock down 99% can still fall another 99%, and there’s no reason this can’t happen with Spirit Airlines if the bondholders take over this company.
This is a bad business in a tough industry with a terrible balance sheet. There’s no good reason to buy Spirit Airlines stock, no matter how far it falls from here.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
