On Monday, Raymond James shifted its stance on Frontier Group Holdings Inc (NASDAQ: ULCC) stock, upgrading the airline from Underperform to Market Perform.
The decision is attributed to an anticipated near-term earnings boost, influenced by significant capacity reductions at competitor Spirit Airlines (NYSE:SAVE) and positive pricing trends in domestic and near-international markets.
Frontier's performance has remained static since July 5, in contrast to a 4% rise in the S&P 500 and an 8% increase among U.S. airline peers, excluding Spirit.
The updated 2024 estimates for Frontier now predict a pretax margin at the higher end of the company's own guidance range of negative 1.5 to positive 1.5 percent, with a 3% expectation for 2025 that is still below Frontier's ambitious 10-14% target.
The analyst from Raymond James noted that for Frontier to achieve its long-term profitability targets and alleviate concerns related to its aggressive expansion using 240-seat Airbus A321 aircraft, a Chapter 7 bankruptcy outcome for Spirit Airlines would likely be required.
However, this is not the expected scenario. Additionally, the analyst pointed out that their fuel price projections are on the conservative side, meaning there could be further potential for earnings to outperform if fuel costs remain lower than anticipated.
Frontier's strategic positioning and pricing dynamics are currently seen as favorable, which has led to the adjusted rating. The upgrade reflects a more neutral view on the stock's potential performance in the near future.
In other recent news, Frontier Group Holdings Inc. has seen a series of financial adjustments from various firms. TD Cowen has maintained a Hold rating for Frontier Group, raising the stock target to $4.00 on the back of updated 3Q24 guidance. The company's management now forecasts nearly breakeven pre-tax margins for the third quarter.
Citi, citing the company's progress in enhancing its revenue and achieving more consistent earnings, raised Frontier's stock target to $4.70 but flagged concerns about Frontier's high financial leverage and cash burn rate.
Susquehanna reduced its revenue estimate for the second half of 2024 by approximately 4% and the full-year 2025 revenue forecast by 6%. Meanwhile, Morgan Stanley maintained an Equalweight rating. Frontier reported a 1% increase in total revenue to $973 million, focusing on cost-cutting measures and operational efficiency.
Despite facing industry challenges, Frontier's strategic adjustments have led to expectations of the company emerging as the low-cost leader by 2025. The company ended the quarter with $658 million in cash and 148 aircraft in its fleet, deferring 54 aircraft from 2025 to 2028, extending lease deferrals to 2031. These are recent developments that investors should consider.
InvestingPro Insights
Recent InvestingPro data provides additional context to Raymond James' upgrade of Frontier Group Holdings. The company's market cap stands at $1.09 billion, with a price-to-book ratio of 2.09 as of the last twelve months ending Q2 2024. Despite the upgrade, Frontier faces challenges, as evidenced by its negative operating income of $300 million and an operating income margin of -8.31% over the same period.
InvestingPro Tips highlight both positive and negative aspects of Frontier's current position. On the upside, 5 analysts have revised their earnings upwards for the upcoming period, aligning with Raymond James' more optimistic outlook. The stock has also shown a significant return over the last week and a strong return over the last month, with price total returns of 15.24% and 33.33% respectively.
However, investors should note that Frontier operates with a significant debt burden and may have trouble making interest payments. The company is also quickly burning through cash, which could impact its ability to achieve the ambitious profitability targets mentioned in the article.
For a more comprehensive analysis, InvestingPro offers 15 additional tips for Frontier Group Holdings, providing investors with a deeper understanding of the company's financial health and market position.
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