ULCC - Frontier Group Stock: Ready To Soar

2023-06-21 16:11:35 ET

Summary

• Frontier Group Holdings, Inc. continues its aggressive growth plans with plans to grow capacity at more than 20% in Q2.
• The airline should benefit from the Spirit Airlines, Inc. merger, including the recent deal to acquire gates and slots in New York City.
• Frontier Group stock is cheap at only 6x '24 EPS targets, while the airline has a strong cash position.

In a lot of ways, Frontier Group Holdings, Inc. ( ULCC ) is set to benefit from Spirit Airlines, Inc. ( SAVE ) merging with JetBlue Airways Corporation ( JBLU ). The parent of Frontier Airlines will see a dip in the competitive pressure for ultra-low cost carriers as JetBlue transitions Spirit routes to more premium offerings. My investment thesis is Bullish on the Frontier Group airline due to the cheap valuation and this potential catalyst.

Aggressive Growth

The only airline with more aggressive growth than Spirit Airlines in the last year has been Frontier Airlines. As of Q1'23, the airline had grown ASMs by 41% since Q1'19, while Spirit Airlines was second with 34% growth.

Frontier has seen revenues soar past the 2019 levels with $848 million reported in Q1'23 for impressive 55% growth over the $547 million produced back in Q1'19. The March quarter saw a nearly equal contribution in growth from RASM and capacity growth at just below 20% each.

Again, JetBlue acquiring Spirit will leave the ULCC space wide open for Frontier Airlines to further grab market share and expand routes. The airline recently announced an aggressive expansion with 22 new routes, including significant expansion in Cleveland, San Francisco and Tampa, targeting over 20% capacity growth in Q2.

The airline expects to further boost revenues in the future with growth in the ancillary category. Frontier is working on product innovation from loyalty programs and subscriptions in order to boost a current $80 per passenger revenue level to a goal of $100 in 2026.

Again, this is another category where having Spirit Airlines in the category group makes for an attractive position for an investment. Frontier will benefit from a top competitor leaving the ULCC segment.

In fact, JetBlue just agreed to sell 6 gates and 22 slots at LaGuardia Airport ((LGA)) in New York City to Frontier in order to close the deal. The deal is expected to close in the 1H'24, but regulatory risk remains high.

The airline is even able to shift capacity more to the peak period, as passengers with work-from-home flexibility are driving traffic even further away from non-peak travel on Tuesday and Wednesday. Frontier sees a 25% boost in the fares on those days versus only 19% pre-Covid.

Profit Boost

While Frontier Airlines has already produced some quarterly profits, the company still hasn't generated those massive profits to attract investors. The stock is stuck below $10 due to the odd disbelief from investors regarding the abundant future profits, while cruise lines have already soared without even returning to reporting consistent quarterly profits.

Those massive quarterly profits should start now, and the shift to big cash flows should alter the investment view on the stock. Frontier is set to hit a $1 EPS this year, starting with a $0.30 EPS in Q2 and ultimately leading to a $1.50+ EPS in 2024.

Even more amazing, Frontier has a market cap of only $2.2 billion, yet the airline has a net cash position of $363 million, with $790 million in total cash. The airline is a rare case in this sector with a strong cash position.

The stock only trades at 6x 2024 EPS targets, which aren't a big boost from the Q2'23 annualized rate. Cruise lines already trade at far higher multiples, and the EPS targets for Frontier aren't a huge stretch.

Takeaway

The key investor takeaway is that Frontier Group Holdings, Inc. stock appears ready to soar from the combination of a cheap stock price and the benefits of Spirit Airlines exiting the ULCC space after the likely merger with JetBlue. The stock is far too cheap here, as the market generally overlooks the airline space, providing a great opportunity to continue building positions in the space.

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