Warren Buffett might have written off airline stocks from his portfolio, however the airline industry has been performing quite well over the last three years. It has been consistently profitable and, looking further, the future outlook also seems quite positive. In this article, I will write about some undervalued stocks that can earn you decent returns.
Airline industry scenario
Since its deregulation in 1978, the US airline industry has been very competitive. With an aggregate market cap of $37 billion, the industry operates on a thin margin of 3.4%. There are numerous factors like low switching costs, high supplier bargaining power and intense competition which makes this sector unfriendly for investors. But for a value investor, this sector is a gold mine currently. Invest in these three stocks and get ready for high returns.
1. JetBlue Airways Corporation (NASDAQ:JBLU) operates nearly 180 aircraft flying across the US, Caribbean and Latin America. It is recognized for its good service and in-flight entertainment. In the past year, the EPS growth has been a terrific 30% and analysts are expecting it to continue. Sales have also increased at an average rate of 12% over the past five years. JetBlue Airways Corporation (NASDAQ:JBLU) shares have provided a 55% return. The stock is undervalued; this is fairly visible from the PEG ratio, which calculates the P/E ratio taking into account the growth factor. The PEG ratio forJetBlue Airways Corporation (NASDAQ:JBLU) is 0.4 much less than the ideal ratio of 1, which means that the stock has enough value to even double in the next few months from the current price of $6.43.
2. Hawaiian Holdings, Inc. (NASDAQ:HA) is the largest and longest serving airline for Hawaii. It operates 43 flights daily between Asia and the Unites States. Apart from this, the airline has been in the process of launching new flights between Honolulu and Taipei/Beijing. Revenues have been steadily increasing; the growth rate (14%) even surpassed JetBlue Airways Corporation (NASDAQ:JBLU) by 2 percentage points. In the past year, EPS grew by 27% and is set to grow further. Hawaiian Holdings, Inc. (NASDAQ:HA)’ PEG ratio is just 0.2. That is one sixth of 1.26, the airline industry’s average PEG ratio. However, the stock is relatively risky if compared to JetBlue Airways Corporation (NASDAQ:JBLU). That is due to the limited growth opportunities. owing to an inadequate number of flights. Also Hawaiian Holdings, Inc. (NASDAQ:HA) operates its flights in a concentrated demographic region. So if the demand fluctuates on that route, it will be a worry for Hawaiian. However, overall the stock is a good buying opportunity. With a forward P/E of 4, this airline stock is set to grow in the coming months.