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Controladora Vuela Compañía de Aviación, S.A.B. de C.V. VLRS, popularly known as Volaris,is one of the cheapest stocks in the broader Zacks Transportation - Airline industry with a Value Score of A.
The VLRS stock is trading at a discount with a forward 12-month price-to-sales (P/S) of 0.29X compared with the industry’s 1.14X.
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Volaris, based in Mexico, is an ultra-low-cost carrier. VLRS shares are cheaper than those of the United States-based ultra-low-cost carrier Frontier Group ULCC. VLRS’s cheap valuation is attractive for investors. However, is it worth buying at current prices? Let us dig deeper to find out.
Strong Q3 Results From VLRS Despite Capacity Reduction
Last month, Volaris, which serves Mexico, the United States, and Central and South America, reported better-than-expected earnings per share and revenues, in the third quarter of 2024,driven by strong air travel demand across all markets during the summer season.
VLRS’ third-quarter 2024 earnings of 32 cents per share handsomely beat the Zacks Consensus Estimate of 19 cents. The bottom line skyrocketed 197% year over year, reflecting the Mexican carrier’s prudent cost-control efforts. Average economic fuel costs declined 16.6% year over year, supporting the bottom line. Total revenues of $813 million surpassed the Zacks Consensus Estimate of $795.9 million. Revenues were aided by increased base fares and ancillary revenues per passenger.
The load factor (percentage of seats filled by passengers) was a healthy 87.4% despite the 14.4% reduction in available seat miles (a measure of capacity). As considerable part of its Pratt & Whitney-powered narrowbody fleet was out of service, it led to a substantial capacity reduction.
Even though a sizeable portion of VLRS’s fleet is expected to stay grounded till the end of 2024 (capacity for the year is expected to decline 13% from 2023 actual), the Mexican airline expects total revenues for 2024 to be close to 2023. This reflects the Mexican carrier’s prudent approach toward capacity management. Capital expenditure for 2024 is expected to be $400 million.
Factors Supporting VLRS’s Growth
Volaris is gaining well from the immense opportunity to switch bus passengers to air travel. VLRS has converted millions of bus passengers into first-time air travelers. The long-distance bus network in Mexico is seen by VLRS as an ideal growth opportunity to attract passengers.
As a result of the restoration of Mexico's safety rating by the United States, capacity rationalization has emerged in Mexico's domestic market. This has created opportunities for Volaris in the transborder market.