By Sam Boughedda
Shares of low-cost carrier Spirit Airlines (NYSE:SAVE) gained Friday after its stock was upgraded to Overweight from Neutral by JPMorgan analyst James Baker.
Baker also increased the firm's price target on Spirit to $30 from $24, telling investors they believe a merger involving the airline is a "high probability outcome."
Spirit recently postponed a shareholder vote on its potential merger with Frontier (NASDAQ:ULCC) after JetBlue (NASDAQ:JBLU) made another bid for the carrier. Last week, both Frontier and JetBlue improved their offers.
The analyst said they "believe a merger outcome between Spirit and JetBlue is a growing probability and may overtake the likelihood of a Frontier deal.
"Most importantly, Spirit shares are trading in line with the proposed Frontier offer, and – owing to the break fee – slightly below what Spirit shareholders would receive if the DOJ were to block the transaction today, holding current share prices constant."
Baker argued that this insulates Spirit shares from any material downside in the near term, and they believe Spirit shares should be held at least until the revised June 30 shareholder vote.
"Ascribing an 80% probability of achieving a $31.50 (JetBlue offer) outcome and 20% to current levels, our Spirit price target rises from $24 to $30 and our rating from Neutral to Overweight, relative to a field of five 'Neutrals.' Additionally, we recommend an options trade, specifically a July 15th $20/$25 strike risk reversal (sell a put to buy a call indicatively paying $0.07 [0.32% premium vs $22.29 ref price] for just over one month and into the recently delayed shareholder vote on June 30th)," concluded the analyst.