Thursday, February 11, 2021
If there’s one thing you can always count on, it’s this:
Bull markets always lead to boom times for initial public offerings (IPOs).
And it’s no different this time around. In fact, the number of companies going public last year surged to a six-year high of 218.
Amidst so much IPO activity, it’s easy to miss out on compelling opportunities. Especially if you focus exclusively on red-hot sectors like fintech, electric vehicles, or biotech.
That’s why, earlier this week, I alerted you to a high-potential IPO in the most unlikely of sectors: airlines.
As you know, tremendous headwinds exist for all airline companies. But when it comes to Sun Country Airlines (Proposed Ticker: SNCY), that could play to our advantage.
You see, given the headwinds, the company might be forced to price its IPO way cheaper than normal.
And since we know that air travel will inevitably rebound, this could represent a rare chance to buy a not-so-hot IPO today — and make a fortune in the future.
But to truly determine if this IPO is worth our time and attention, we need to ensure that it possesses the five fundamentals necessary to soar in the aftermarket.
So let’s get to it…
Five Hallmarks of a Profitable IPO
- Revenue: Research from Professor Jay Ritter at my alma mater, the University of Florida, has demonstrated that companies with more than $100 million in sales prior to their IPO perform best, rising an average of 42.8% over three years. Sun Country passes with flying colors (pun intended) here. In the 12 months ended Sep. 30, 2020, the company booked $458 million in revenue.
- Verifiable Growth Opportunity: An IPO is an investment in a company’s future growth. You might think the airline industry is mature and devoid of growth. But think again! In addition to a snapback in demand that’s inevitable as travel restrictions lift in the aftermath of Covid-19, air travel has been steadily climbing 7% each year in Sun Country’s main passenger markets. At the same time, the company operates as a cargo and charter carrier. And you guessed it — both these markets are growing impressively, too. Thanks to a boom in e-commerce, the cargo sector keeps growing by almost $5 billion per year. (It’s worth noting, Sun Country operates 10 planes and counting exclusively for Amazon.) And Sun Country’s main charter segment is expanding at a healthy 6% annual clip. In other words, there’s plenty of growth ahead.
- Insider Ownership: We should insist on a minimum of 30% insider ownership. But since Sun Country’s SEC filing is so fresh, this information hasn’t been published yet. So we’ll have to wait for final confirmation that the interests of insiders and investors are adequately aligned.
- Offering Size: $100 million is the key threshold here, as it weeds out the riskiest deals and ensures ample liquidity in the aftermarket. As it turns out, Sun Country plans to raise at least $100 million with its IPO, setting the stage for a strong debut in the aftermarket.
- Profitability: Unless a company is profitable (or on a clear path to profitability), avoid it. Otherwise, expect to lose a lot of money… just like IPO investors in Uber (UBER), Snap (SNAP), and Blue Apron (APRN) lost money. This is a hard-and-fast IPO screening criterion because share prices ultimately follow earnings. Here’s the good news: not only is Sun Country profitable, it’s way more profitable than every other airline right now, as you can see in the chart below. As the airline industry’s rebound begins in earnest — and Sun Country’s sales and profits continue to increase — its share price is bound to follow suit.
(click image to enlarge)
The Final Factor
The last criterion to consider, of course, is valuation. Because we don’t want to overpay for growth.
But before we can determine whether the price is right, we’ll have to wait for Sun Country to finalize its IPO plans.
So for now, put Sun Country on your IPO Watch List for 2021. And stay tuned for future updates.
Ahead of the tape,