Stock Analysis & Ideas

Why Volaris Stock Might Sink Further

I am bearish on Controladora Vuela Compania de Aviacion SAB de CV (VLRS), also known as Volaris, shares for the following reasons.

The surge in oil and gas prices amid supply concerns related to the war in Ukraine has led to a general downtrend in U.S.-listed airline stocks.

The energy shock spared none of the aviators, including Controladora Vuela Compania de Aviacion SAB de CV, a Mexican provider of air transportation of passengers and freight in the mainland, the United States and Central and South America, whose shares this year have remained mostly flat.

Controladora Vuela Compania de Aviacion SAB de CV

Controladora Vuela Compañía de Aviación, S.A.B. CV is an ultra-low-cost airline offering over 510 daily flights connecting 43 cities in Mexico, and 27 cities in the United States and other parts of Central and South America.

Passenger and cargo transportation services are offered by operating a young fleet of 102 aircraft

FY and Q4 2021 Results

Controladora Vuela’s portfolio has significantly accelerated the company’s recovery from the COVID-19 crisis, as illustrated by the results below.

In the last quarter of 2021, the pro forma Earnings Per Average Diluted Share (EPADS) was $0.65, beating the average analyst estimate by $0.18.

Revenue came in at $678 million (up nearly 43% year-over-year), beating analysts’ median forecast by nearly $11 million.

EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent charges) was approximately $251 million, up 45% year-over-year for an EBITDAR margin of 37% of total revenue. The EBITDAR margin went up 50 basis points year-over-year.

For the full year, the Mexican airlines provider generated pro forma EPADS of $1.62 on total revenue of approximately $2.2 billion, with the latter item up 29% year-on-year.

Driven by higher revenue per unit and a disciplined approach to cost control, EBITDAR was $798 million, up 53% year-over-year.

EBITDAR margin was 36.7% of total revenue, up 590 basis points year- over-year.

Balance Sheet

As of December 30, 2021, the balance sheet reported cash and cash equivalents of $741 million against a debt obligation of approximately $2.72 billion.

The interest coverage ratio of 3.59 indicates that Controladora Vuela can pay the interest charges on outstanding debts.

The company’s financial position is also characterized by an Altman Z-Score of 1.02, which means that the company could go bankrupt within a few years.

For beginners, the first key figure should be at least 1.5 so that a company’s balance sheet can be considered solvent.

The Altman Z-Score predicts the likelihood that a business will fail within a few years. A value less than or equal to 1.8 indicates financial distress, so the probability of bankruptcy is not low.

In addition, Controladora Vuela has a net debt-to-trailing 12-month EBITDAR ratio of 2.5, the lowest the company has ever reported. The third ratio gives the current EBITDA two and a half years to fully repay the debt.

Looking ahead to full-year 2022, the company is targeting revenue of $2.6 billion to $2.8 billion, while capital expenditures are expected to be between $140 million and $145 million.

Outlook

So far, the crisis in Ukraine and the associated sanctions against Russia have weighed on aircraft operator stocks, mainly due to fears about the normal supply and availability of fossil fuels.

With Russia being a major supplier of fossil fuels to several European Union countries, concerns about the regular flow of these commodities have driven prices up like crazy, and affected the creditworthiness of airline balance sheets.

When fossil fuel prices shoot up so much that they become a major component of record inflation, as they are now, even the most sophisticated hedging strategies these companies typically use to mitigate the impact are not enough to prevent sell-side analysts from releasing negative earnings growth estimates.

Tackling higher inflation could prompt central banks to raise interest rates quickly, which certainly doesn’t encourage spending on vacations and flights.

The above headwinds are likely to affect the profitability of Controladora Vuela.

Wall Street’s Take

Over the past three months, six Wall Street analysts have issued a 12-month price target for VLRS. The company has a Strong Buy consensus rating based on six Buys, zero Hold, and zero Sell ratings.

The average Controladora Vuela Compania de Aviacion SAB de CV price target is $26.74, implying 49.1% upside potential.

Conclusion

The company’s overall health is acceptable, but this stock is likely to continue to decline given long-term headwinds from macroeconomic conditions, and the central banks’ policies to counter them.

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