Why Virgin America Remains 'Underappreciated'

• Shares of Virgin America Inc (NASDAQ: VA) are down 17.5 percent year-to-date, but have bounced 24 percent from its recent lows in July.
• Daniel McKenzie of BRG maintained a Buy rating on Virgin America with a price target raised to $50 from a previous $47.
• McKenzie's revised price target stems from lower fuel expense and "incremental confidence" in its revenue outlook growth.

Buckingham Research Group analyst Daniel McKenzie is incrementally more bullish on Virgin America following a recent meeting with the company's management team.

In a report published Thursday, McKenzie maintained a Buy rating on Virgin America with a price target raised to $50 from a previous $47 as the company's management "made it clear" they have the strategies to generate top line and margin expansions.

McKenzie said Virgin America has several "sizeable" revenue levers that the company can grow, especially following recent IT upgrades. In addition, the analyst argued that the company's fundamentals are "better than the Street appreciates" and based on the available data, management "appears to have guided conservatively" for the third quarter.

McKenzie also pointed out that code share is another opportunity for Virgin America. The company currently has five code share partners and 31 interlines. In terms of competition, industry capacity at Virgin America's markets rose 0.3 percentage points in the third quarter and 0.2 percentage points in the fourth quarter – an "immaterial" movement.

Finally, McKenzie noted that Virgin America has outperformed industry PRASM trends (passenger revenue per available seat mile) in five of the past seven years and management's goal is to continue doing so.

Bottom line, even though shares have already bounced 24 percent from its recent lows, the stock is still only trading at 8.6x the analyst's 2016 earnings per share estimate (raised to $4.15 from a previous $3.55) which is a "very attractive" valuation.