In a recent article, I wrote that Volaris Aviation’s (VLRS, Financial) stock may be near a peak and investors should consider selling it once the company released its quarterly results.
The primary reason I told investors to wait until the quarterly results was because I expected the company to beat the analysts’ estimates on both revenue and earnings, which in turn would lead to a spike in the stock price.
This is exactly what happened when Volaris Aviation shared its fourth-quarter earnings earlier this week. The company’s Q4 EPS came in at 38 cents, way ahead of the analysts’ estimate of 28 cents. As for revenue, the company’s top line surged 10% year over year to $296 million, beating the analysts’ estimates again by a big margin of $38.3 million.
Given the increasing price war in the aviation industry, Volaris Aviation has managed to perform pretty well in the last few months. As a result, shares of the company are near all-time highs, which is why investors should consider taking profits off the table.
Although Volaris’ international expansion will lead to strong revenue growth in the future, the positives are already baked in the company’s share price. With a P/S ratio of over 2, and forward P/E of 13, Volaris’ stock is more expensive than its peers in the American aviation industry.
For instance, Spirit Airlines (SAVE, Financial), Volaris’ American counterpart, is trading at 10x forward earnings and has a P/S ratio of roughly 1.5. Analysts are expecting both Spirit and Volaris to continue growing at the same pace, which is why the latter doesn’t have much upside potential left.
Moreover, Volaris still generates most of its revenue from the Mexican aviation industry and the growing strength of the U.S. dollar against the peso can hurt the company’s earnings and revenue going forward. The stock is up almost 50% since my initial recommendation back in July, and given the reasons mentioned above, it is time for investors to consider booking profits.
Conclusion
Although Volaris’ international expansion will drive strong revenue growth going forward, the short-term positives are already baked into the current valuation. While shares of Volaris aren’t expensive, there are better options out there for investors. In addition, due to the increasing strength of the Mexican dollar, investors would be better off investing in U.S.-based airlines that have little-to-no exposure to the international market. Investors should sell Volaris in favor of airlines like Spirit.
