Why Bank Of America Now Thinks Virgin America Is A Buy

In a report issued Tuesday, Bank of America Merrill Lynch analyst Andrew G. Didora upgraded his rating on Virgin America Inc VA from Underperform to Buy and raised his price target from $32.00 to $41.00 on robust revenue outperformance.

According to the note, the company has shown its unit revenues can outpace those of its industry peers, “given its product offering and exposure to San Fran. LA and NY.” Further, its low margins (13 percent pre-tax) provide it with significant leverage to lower oil prices.

The firm boosted its 2015 and 2016 EPS estimates by 10 percent and 28 percent, respectively, to $4.47 and $5.08.

The analyst went on to explain that the firm’s previous rating responded to Virgin America’s exposure to “competitive markets such as transcon routes out of NY vs JetBlue Airways Corporation's Mint product (22% of capacity) and the well documented competitive pressures in Dallas (12% of capacity).”

Nonetheless, the company’s unit revenues (PRASM) surged 3.2 percent in the first quarter and 0.6 in the second quarter, outperforming the industry, which grew 0.9 percent in the first quarter and fell 3.8 percent in the second. Unit revenue growth helped the company deliver a large beat in the second quarter.

Moreover, Didora noted, “if history is a guide, this outperformance should continue,” and the firm’s PRASM estimates could prove conservative.

Other factors helping Virgin America outperform its peers amidst a time of general weakness are its exposure to the West Coast and easing competitive pressures in some key markets.

Shares of Virgin America rose more than 8 percent on Tuesday.