Monday, February 29, 2016

42nd AIM Equity Update by Patrick Sanchez. Volaris (VLRS) "The Southwest Air of Mexico?"


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

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