Virgin America Stock Outlook

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Mar 24, 2015
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As oil prices have continued on their largely uninterrupted downward spiral, it is good news for airline stocks which have seen a direct positive impact on their accounting books. Earlier this month, when February data was announced by Southwest Airlines (LUV, Financial) which topped analyst estimates that too had a positive impact on other airlines in its peer group, such as Spirit Airlines (SAVE, Financial), JetBlue (JBLU, Financial) and Virgin America (VA, Financial). American Airlines Group (AAL, Financial) gained 11% in the week gone by on the back of the news that it is to be added to the S&P 500 Index. Even an underperformer like Hawaiian Holdings (HA, Financial) has racked up over 8% in the last week.

An exception to the upswing

While the other airline stocks have largely continued to do well, share prices for Virgin America have fallen considerably in the last week. One of the reasons behind this exception is that Credit Suisse (CS, Financial) has initiated coverage of the stock with an UNDERPERFORM rating and a 12-month price target of $31 when the stock was trading over $34.

"Virgin America's top 15 routes constitute 70% of capacity, making it more susceptible to competition, particularly on the transcontinental market," the firm noted, adding that the combination of a low fuel environment and increased competitive capacity in the airline's top markets places its revenue premium at greater risk.

Investors also seem spooked by the planned institutional sell-off of nearly 5.6 million shares of the company by hedge funds Cyrus Aviation Holdings and PAR Investment Partners, and by Virgin CEO Richard Branson’s VX Holdings.

Return on investment

While the market may have punished the stock in the last week, the stock has certainly rewarded early investors. From an IPO priced at $23 per share in November 2014, the stock touched a high of over $42, and even at current prices, is still giving a 50% profit. When compared to some of its peer group, the stock has among the lowest P/E ratio of less than 8x. “If Virgin America was to obtain a normal market multiple, the stock would trade over $48 for a roughly 50% gain. At that time, the stock would only trade at a peer group low multiple of 10x forward earnings meaning that the airline would still have more upside after the large gains” stated Stone Fox Capital Advisors in Seeking Alpha.

Room for growth

Virgin America and Spirit Airlines are the two cheapest airlines in the US right now and Virgin currently offers much more amenities than Spirit. With this long list of amenities, Virgin America also targets business travellers primarily and that makes its revenue stream less susceptible to seasonality affecting other budget airlines. Of a fleet of 53 planes, 43 are A320s which are up to 20% more fuel efficient than most other planes used by U.S. domestic airlines. The company is adding another 10 A320s to its fleet this year, and these planes will come equipped with additional devices to further improve efficiency. Most of the $ 210 million raised by the company’s IPO has gone towards paying off a big chunk of its debt, which will drastically reduce its interest expenditure, freeing up cash to fund its expansion plans. With only a 2.5% of the U.S. air passenger share, the company has a lot of room to grow.

All these factors make Virgin America a very attractive buy at the current levels.