Chic low-cost carrier Virgin America, left for dead by many airline industry experts just two years ago, has rapidly improved its earnings power since then. On Monday, it reported yet another quarter of solid earnings growth.
This positions Virgin America for a successful IPO in the next few months. The company also announced the expected price range of its shares on Monday -- $21-$24 -- which would value the whole company at roughly $1 billion.
If that pricing holds, Virgin America may be a good airline stock for investors to consider after its IPO. Virgin America has a devoted following and numerous growth opportunities. This provides a good formula for long-term share price appreciation.
Becoming steadily profitable
In Q3, Virgin America's revenue rose 4.7% to $405.5 million despite a slight decline in capacity. Meanwhile, its operating margin rose from 11.5% to 12.9%, driving a 24% gain in net income to $41.6 million. This brings year-to-date net income to $57.3 million, compared to a loss of $4.0 million through the first nine months of 2013.
Virgin America is likely to post strong earnings growth in Q4 as well, thanks to a significant drop in fuel costs. Jet fuel prices have fallen more than $0.40/gallon -- about 15% -- since the summer, and Virgin America spends roughly one-third of its revenue on jet fuel. If fuel prices remain near current levels, fuel costs will remain a significant tailwind through most of 2015.
Virgin America's recent route restructuring provides additional earnings upside over the next few years. A month ago, Virgin America indefinitely suspended its routes to Philadelphia in order to free up aircraft for new routes from Dallas Love Field to New York's LaGuardia Airport and Washington, D.C.'s Reagan National Airport.
Both of these routes started last month. Virgin America also moved its flights to San Francisco and Los Angeles from the larger Dallas-Fort Worth International Airport to Love Field on Oct. 13. Next year, it will add service from Love Field to Chicago's O'Hare Airport.
Virgin America expects to benefit from Love Field's proximity to downtown Dallas. This will make it easier to lure some business travelers away from American Airlines, which operates a massive hub at DFW. It may take a couple of years to build up a customer base in Dallas, but in the long run these routes are more promising than the Philadelphia service that Virgin America dropped.
Virgin America has been interested in launching an IPO for a long time, but its persistent losses during its first five years of operation made that impossible. However, Virgin America posted its first annual profit last year, putting it in better position for an IPO.
Accordingly, Virgin America filed the initial SEC paperwork for an IPO back in July. Details remained scarce until Monday, when the company announced its proposed pricing range of $21-$24. Even now, the exact timing of the IPO is unknown.
Virgin America has earned about $70 million on revenue of $1.48 billion over the last four quarters. If fuel prices stay relatively low, the company should have no trouble pushing earnings past the $100 million mark in 2015. While that doesn't include much tax expense, Virgin America isn't likely to owe cash taxes for many years due to the credits from its hundreds of millions of dollars in past losses.
Thus, Virgin America's IPO price could value the company at about 10 times 2015 earnings. That would make it quite cheap -- especially considering that tight supply in the U.S. air travel market is creating plenty of profitable growth opportunities.
An opportunity worth considering
Individual investors generally don't have an opportunity to participate in IPOs, and must instead wait for public trading to begin. If the shares begin trading close to the proposed pricing range, Virgin America could be a good opportunity for long-term investors.
Virgin America's recent results show that it can be profitable despite offering more amenities than most U.S. airlines. As its newer routes mature, its margins should expand. Virgin America could also attract M&A interest from other airlines, particularly JetBlue Airways, which has a similar service culture and compatible fleet. Virgin America just might be a $1 billion bargain.
Adam Levine-Weinberg owns shares of JetBlue Airways. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.