Financial Trading Blog
Stock of the day 17/02/2015 – Virgin America Inc
Richard Branson’s company ended its first day of trading on November 14th at $30, an impressive one day increase from its initial offering of £23 per share. And despite a brief wobble in the middle of December which saw the stock hit $30.34 (the all-time low in its short lifespan), by the very end of December the Virgin America hit an impressive $45.37. It managed to hold on to most of this spike as it entered 2015 at $44; however, a displeasing company guidance update on January 23rd saw the stock fall over 10% to $38.37, a decline that has led to its current trading price of $34.79.
This interim statement highlighted 2 main issues for Virgin America. Firstly is the issue of employee pay: the airline is to increase its pilots’ wages by 15%, as well as raising pay by around 5% elsewhere. Whilst this factor has played a key role in the more downbeat forecasts coming out of the company, the more important issue is the cost of oil. Whilst Delta Air Lines estimated a cost of $2.62 per gallon, Virgin’s fuel costs are more likely to be $2.87 for the past year. The reason for this becomes clear when you note that Virgin already has 66% of its Q1 and 44% if its Q2 fuel locked in at rates higher than the current market price. Virgin’s attempts at hedging backfired as oil kept sinking, meaning the airline is struggling to reap the benefits of the commodity’s cheapness, especially when compared to its key rivals.
Based on these two issues, Virgin American expects total unit revenue growth of 2.5-3% compared to the 5.5% it saw in the third quarter. However these figures are fudged slightly by the introduction of new flight paths and the introductory orders that were partnered with this expansion, as well as the misfires in relation to oil. Due to the special circumstances of its forecasts, and the strength of the brand as a whole, analysts remain bullish on the stock, giving Virgin America a consensus rating of ‘buy’ and a target price of $48.20.
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