Volaris
(VLRS, $20.09): “Vuela con Volaris”
By:
Patrick Sanchez, AIM student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Volaris (NYSE:VLRS) is a Mexican low-cost airline that operates in
Mexico and internationally. The company engages in the provision of air
transportation services for passengers, cargo, and mail.
• The firm has positively been impacted by the current
price and availability of oil. Fuel is
Volaris’ largest operating expense (aprox. 40%). If commodity prices remain low, growth will
continue.
• Economic turmoil in China and
internationally hasn’t affected demand for flights due to the company’s focus
on operations in Mexico and North America.
• Volaris will benefit from the
modernization of the bilateral air service agreement. The agreement is aimed at
improving intermodal rights and pricing flexibility among Mexican and American
airlines. This contract entered into effect on 01-Jan-2016.
• The stock has reached its all
time high following outstanding year over year results.
Key
points: Volaris continues to be a solid position in the AIM
International Equity Fund. Volaris is
Mexico’s second largest airline behind Aeromexico with a growing market share
of over 23% of domestic traffic. Volaris continues to be the leader in
Ultra-Low Cost Carrier (ULCC) business model in Mexico, which has allowed for
significant growth while maintaining a low CASM over the last five years. The
firm continues to improve its workforce flexibility and reduced costs while
simultaneously improving product offerings.
In January 2016, VLRS reported
solid results. Demand measured in Revenue Passenger Miles (RPMs) reached $1.2B
(31% increase YoY), and total passengers for the month increased 32.2% YoY.
Capacity increased 23% YoY to 1.364B available seat mile (ASMs) in both
domestic operations and 20.5% YoY internationally. VLRS’s load factor increased
from 80.01% to 85.9% YoY for domestic flights, and an 88% load factor for
international operations.
On February 22, 2016 Volaris announced financial results for
the fourth quarter and full year 2015. Highlights include an increase in total
operating revenues of 29.5% YoY, EBITDA
margin expansion of 5.7% YoY, and an increase of 12.3% YoY in operating income
margins. Volaris’ EPS for 4Q15 produced a positive surprise ($0.38 vs. $0.27)
proving the company’s uniform fleet, high asset utilization, and focus on
direct sales.
What
has the stock done lately?
Recently, the stock has shown
volatility as the rest of the market. For February 2016, the stock has
continued to see volatility but has managed to trend in a positive direction
and is +18.6% for the month. Positive results have caused an increase in
investor demand and have lead to rating upgrades. The rapid depreciation of the
peso against the US Dollar appears to have found a level of stability, which is
expected to improve margins moving forward. The stock currently sits at $20.09
and has reached an all time high.
Past
Year Performance: Since added to the AIM International Fund in
December, 2015 the stock is +12.36%. The headwinds surrounding international
currencies have affected Volaris much less on a relative basis. These
fluctuations in currency have only resulted in short term gains and losses and
have not significantly affected the core of the business. The stock continues
to appear undervalued based on its P/E multiple of 20x compared to an industry average
of 33x.
Source: FactSet
My
Takeaway
Volaris continues to outperform its peers as it has taken advantage of the consolidation of
the traditional legacy network airline industry by implementing solutions aimed
to reduce their cost structure and gain market share. CEO, Enrique Beltranena is a firm believer that economic
indictors suggest that there is much expansion potential remaining in the
Mexican aviation market. Volaris results are a combination of operational
excellence and its niche focus on the ULCC market. If the company continues to
open new segments at the same rate (22 new routes in FY15) the stock could
reach new highs in the near future.
Source: FactSet
