Why Raymond James Downgraded Virgin America

• Virgin America Inc VA shares are up 26 percent in the past 3 months after touching a low of $27 on June 29.
• Raymond James’ Savanthi Syth downgraded the rating on the company from Outperform to Market Perform, while raising the price target from $38 to $39.
• Any upside is unlikely until the benefits of the company’s growth strategy are visible, Syth mentioned.

Analyst Savanthi Syth believes that there is limited upside to Virgin America’s stock valuation unless results of the company’s growth strategy are visible. He explained, “Substantial upside is likely to require further evidence of the successful implementation of its growth strategy (likely with 1Q16 results) and the removal of the pre-IPO shareholder overhang.”

Virgin America is yet to fully realize the benefits of the lower fuel prices due to its hedging strategy. Syth added that continued weakness in fuel prices in 2016 and the execution of the company’s growth strategy could result in a 36 percent upside.

Although the competitive capacity growth against Virgin America stands elevated, at 7 percent y/y in 1Q-3Q15, it is expected to moderate gradually to 6 percent in 4Q and to 5 percent in 1Q16, Syth said.

The company’s ancillary revenue is expected to grow in 2H15 and thereafter due to the upgrades to Virgin America’s Sabre system. The company’s ability to dynamically price the priority boarding and extra leg room on longer routes could also boost its annual pretax revenue per share, the Raymond James report stated.

Virgin America’s modest growth in 2H15 is unlikely to pressurize its profitability, Syth mentioned, while adding that the company is poised to benefit from the introduction of high yield routes.