A Small Cap Discount Airline Stock You Have Probably Never Heard of (VLRS, LUV & JBLU)

When most American investors think of discount airline stocks, they probably think of relatively large capped Southwest Airlines Co (NYSE: LUV) or sort of small cap JetBlue Airways Corporation (NASDAQ: JBLU) rather than small cap Controladora Vuela Co Avcn SA CV (NYSE: VLRS) which owns Volaris – a discount airline serving the Mexican market. However, any investor who has read Benjamin Graham's Intelligent Investor might want to remember his sage advice about avoiding airline stocks – mainly because airlines were such a new and unproven sector that had yet to make money. But could Controladora Vuela Co Avcn SA CV actually be an airline stock worth owning?

What is Controladora Vuela Co Avcn SA CV

Controladora Vuela Co Avcn SA CV first took off in 2003 when the Discovery Americas I and Columbia Equity Partners funds joined with TACA Airlines to create a new low-cost airline to serve the Mexican market to allow a greater number of Mexicans to experience air travel. Volaris launched on March 13, 2006 with an inaugural flight from Toluca to Tijuana while on July 12, 2006, the World Bank (through their Latin American financial division) granted the company 40 million dollars in financing, thus consolidating a 130 million dollar investment. Today, Volaris is Mexico's second largest airline after Aeroméxico and the airline has Mexico's youngest fleet, made up of 43 aircraft aircraft averaging 4 years in service from the Airbus A319 and A320 families.

For reference, Southwest Airlines Co. was established in 1967 and is now the world's largest low-cost carrier while JetBlue Airways Corporation was founded in February 1999 and it has the distinction of being one of the few US airlines that made a profit during the sharp downturn after 9/11.

What You Need to Know About or Be Warned About Controladora Vuela Co Avcn SA CV

In early November, Controladora Vuela Co Avcn SA CV reported its preliminary traffic results for Volaris for the month of October. The total number of booked passengers in October rose 26.0% year over year to reach 717,000 passengers while Revenue Passenger Miles (RPMs) increased 21.6% year over year. Volaris also registered a load factor of 76.8% in October 2013 and 83.2% in October year-to-date.

At the end of October, Controladora Vuela Co Avcn SA CV that total operating revenue increased 11.1% year over year to a record Ps.3,722 million while net income excluding special items increased 38.7% to Ps.319 million. The earnings release cited key drivers during the quarter as being slower Mexico and US economic growth, weather conditions (hurricane "Ingrid" and tropical storm "Manuel" resulted in 18 canceled flights and more than 145 delayed flights) and exchange rate depreciation but Volaris still accounted for 48% of the passenger volume growth for the first eight months of the year among domestic carriers. Perhaps more importantly, the operating expenses per available seat mile (CASM) for the third quarter fell 4.7% year over year to Ps.113.9 cents driven by "efficiency benefits and sustained cost control discipline."

Looking over Controladora Vuela Co Avcn SA CV's financials reveals growing annual revenues of Ps.11,686.42M (2012), Ps.8,878.62M (2011), Ps.6,777.39M (2010) and Ps.5,045.88M (2009) for the past four years and net income of Ps.215.24 (2012), a net loss of Ps.293.54 (2011) and more net income of Ps.572.23 (2010) and Ps.196.66 (2009). At the end of the last reported quarter, Controladora Vuela Co Avcn SA CV also had Ps.2,974 million in unrestricted cash and cash equivalents (representing 23% of last twelve month total operating revenues) plus recorded negative net debt (or a positive net cash position) of Ps.2,565 million.

Best Casino Stocks To Watch For 2014

Otherwise and back in September, Volaris became the first Mexican company to list its IPO on the NYSE in 2013 and the second from Latin American for the year when it raised close to $350 million in an IPO priced at the bottom of its proposed range of $12 to $14 per ADS. According to the Wall Street Journal, the IPO attracted "emerging market funds, specialized airline investors and wealthy Mexicans" plus the involvement of ex-America West CEO William A. Franke, former Mexican Finance Minister Pedro Aspe and Roberto Kriete, the chairman of carrier AviancaTaca helped reel in investors who would normally shy away from airline investments. Moreover, the Wall Street Journal noted that growth prospects for Volaris remain good because the average Mexican makes 0.5 air trips a year verses 25 bus trips according to data cited in the prospectus.

Share Performance: Controladora Vuela Co Avcn SA CV vs. VLRS, LUV & JBLU

On Monday, Controladora Vuela Co Avcn SA CV rose 2.55% to $14.50 (VLRS has a 52 week trading range of $12.50 to $15.52 share) for a market cap of $1.47 billion plus the stock is up 3.5% since mid-September. Here is a quick look at the longer term charts for both Southwest Airlines and JetBlue Airways:

As you can see from the above chart, discount airline stocks Southwest Airlines and JetBlue Airways have bounced around since the financial crisis while the following chart will give you an idea about their long long term performance:

Finally, here are the latest technical charts for all three discount airline stocks:

The Bottom Line. While investors should probably follow the advice of Benjamin Graham, small cap Controladora Vuela Co Avcn SA CV and its discount airline Volaris could be the exception to the rule or at least worthy of a closer look.