Shares of hip carrier Virgin America (VA) are flying, up $4.15, or almost 12%, at $39.96, after underwriters of its November 14th initial public offering were freed up to initiate coverage and responded with mostly positive notes.
Of the eight underwriters — Barclays, Deutsche, Merrill, Cowen, Goldman, Imperial Capital, Loyal3 Securities, and Raymond James — I see five Buy-equivalent ratings today, and one Hold, from Raymond James.
Virgin, which began its U.S. operations in 2007, generated $56 million in net income off $1.12 billion in revenue in the first nine months of this year, according to its IPO prospects. That was up from a $4 million loss last year on revenue of $1.06 billion in the same nine-month period. As of September, the company had amassed a deficit of $334 million.
The shares have a heavy concentration of top stockholders, with the biggest chunk owned by Cyrus Aviation Holdings, at 39.9% before the IPO and an expected 33% following it; VX Holdings, with 22% pre-IPO and 25% post-IPO; and PAR Investments with 6.5%.
Cyrus, which as recently as 2010 held as much as 55.5% of the stock, is held by Cyrus Capital Partners, a distressed-debt fund manager. VX is the employee holding company for employee share interests in the stock.
Imperial Capital‘s Bob McAdoo starts coverage with an Outperform rating, and a $52 price target, writing that after losing money its first six years in business, because of startup costs and the need to grab market share, Virgin changed focus last year to making money:
The company has since reduced or even suspended service in various underperforming markets. More recently, five of the past six quarters have produced net profits, a trend we expect to continue given management's current focus and with recent significantly lower jet fuel prices. Later in this report, we provide more detail regarding some of the specific steps taken to improve profitabilit
Moreover, Virgin’s “premium” clientele has allowed it to generate higher ticket prices, on average, especially for key trans-continental routes, compared to American Airlines (AAL) and other legacy operators:
With an upscale product on new Airbus narrow body aircraft, VA has routinely generated higher average fares and higher RASM on both long haul and short haul extremely competitive routes vs. legacy and traditional low cost carrier. Virgin has consistently generated higher average fares and higher revenue per mile than American Airlines, Delta Air Lines (DAL), and United Airlines (UAL) on transcontinental routes such as JFK to LAX and JFK to SFO [...] During 4Q13, in the LAX to JFK market, Virgin America generated an average fare of $284, $17 above the second highest fare of $267 for American and $39 above the average fare for all carriers in this market. In 2Q14, the last period for which Department of Transportation data is available, American Airlines surpassed Virgin in terms of both average fare and RASM. This was the result of AAL's switching to new smaller aircraft, thus cutting its capacity in the LAX to JFK market by approximately 18%. The reduction effectively reduced the number of discounted seats offered by American, squeezing the 18% lowest fare paying passengers off the AAL flights and thus driving the average AAL fare higher. We do not believe there was a material change in the relative performance of Virgin versus American in the top three-fourths of the fare paying passengers.
Raymond James‘s Savanthi Syth, on the other hand, starts the stock at Market Perform, with no formal price target, writing that “the risk-reward is balanced at current levels.”
Virgin has some pressure on “yields” as a result of price cutting by Southwest Airlines (LUV) in the Dallas market, and by JetBlue Airways (JBLU) in New York:
We believe Virgin America is seeing yield pressure in its Dallas markets (7% of its total seats) due to aggressive fare action by Southwest, as Southwest launches new non-stop service and also responds to Virgin America's move to Love Field where it operates. While the competitive capacity growth in Dallas should remain elevated through 3Q15, pressure on yields is likely to ease as Southwest backs away from introductory fares – the timing of which is uncertain. Additionally, yields may be pressured in 2015 in the New York to San Francisco and Los Angeles markets, which together account for almost 10% of Virgin America's seats, as JetBlue aggressively ramps up capacity related to the roll out of its Mint product.
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