Strangely, since Warren Buffett wrote off airline stocks from his portfolio in 2008, the airline industry has delivered three straight years of profitability. The industry outlook for 2013 also looks quite positive. Many investors have ignored this fact, but the sector has been a stock market leader over the last few years. The trend is expected to continue and the best part is, you can find some undervalued stocks and earn decent returns. Let me help you out by listing these stocks and how you can gain big by investing in them.
US airline industry outlook
It is true that the U.S. airline industry has become very competitive since its deregulation in 1978. The industry has been operating on a razor-thin margin. It has a total market capitalization of $37 billion and has an operating margin of 3.4%. The decline in traffic growth is hurting the sector, however the airlines took note of it and introduced fees for checked luggage, which helped minimize losses.
Several factors, like intense competition, low switching costs, and high supplier power are the reasons why investors shy away from this sector. But, if you are a value investor, you would prefer not to avoid this, and instead cash in big by investing now. Let me give you a list of three stocks that I consider to be undervalued, based on their earnings potential.
JetBlue Airways Corporation (NASDAQ:JBLU) is one such undervalued stock in the airline sector right now. It operates around 180 aircraft, flying across the U.S., the Caribbean, and Latin America, and is known for its award-winning service and in-flight entertainment.
The company witnessed an increase in sales by an average rate of 12% over the past five years. If I look at last year's EPS growth, it is tremendous at 31%. Analysts are expecting the trend to continue for at least the next two years.
The shares of JetBlue Airways Corporation (NASDAQ:JBLU) have given a 55% return in the past year, compared to S&P’s 14%. In the latest March report, passenger traffic increased by 8.6% from the same period last year. The fact that the stock is undervalued can be seen from the PEG ratio, which compares the P/E ratio to the EPS growth rate. Any PEG ratio less than 1 is desirable, and is considered a cheap buy. The ratio for JetBlue Airways Corporation (NASDAQ:JBLU) is less than 0.4, which signifies there is significant value in the stock and it can double in the next few months.
Hawaiian Holdings, Inc. (NASDAQ:HA) is Hawaii’s biggest and longest-serving airline, and is known for its on-time performance. The airline operates 43 flights daily between the Unites States and Asia. Revenue growth of the company beat even JetBlue Airways Corporation (NASDAQ:JBLU) by two percentage points, standing at 14%. EPS growth over the past year grew 28% and is set to grow further. PEG ratio of Hawaiian Holdings, Inc. (NASDAQ:HA) is just 0.2, which is one-sixth of the airline industry’s average of 1.26.
The stock is comparatively risky compared to JetBlue Airways Corporation (NASDAQ:JBLU), as growth opportunities are limited due to its lower number of flights and operation in a particular demographic region. However, initiatives have been taken by the company, as it recently announced new flight launches between Honolulu and Beijing/Taipei. Altogether, the stock is a great buying opportunity. It is now trading cheap at $5 and the forward P/E ratio is four, indicating an increment in value in the coming months.
Founded in 1924, Delta Air Lines, Inc. (NYSE:DAL) has a fleet of 700 aircraft and operates in the U.S. and international locations. The on-arrival time rate of Delta Air Lines, Inc. (NYSE:DAL) is 85% and it has been recently named as the most admired airline for 2013.
Similar to JetBlue Airways Corporation (NASDAQ:JBLU) and Hawaiian Holdings, Inc. (NASDAQ:HA), the EPS forecast is high for Delta. It has given more than 50% return to investors since December 2012. The stock is currently trading at $15 and has the potential to go up further. This can be seen from the PEG ratio of 0.22, which is much lower than the industry average. Forward P/E till December 2014 is at $5, which indicates the degree to which the stock is undervalued.
Another positive point for the airline is the low debt and relatively high cash it is holding. Airlines, being capital intensive, usually carry high debt due to high equipment and maintenance cost. Delta Air Lines, Inc. (NYSE:DAL) can be considered safe in this regard.
The three airlines discussed above have reported increases in passenger traffic in their March 2013 reports. Besides, they have continued their impeccable services such as on-time delivery and in-flight passenger entertainment. Watch out for these stocks, some of them have their next earnings reports scheduled at the end of this month. If they report an impressive quarter, prices will definitely shoot up.
The article Fly High With These UnderValued Airline Stocks originally appeared on Fool.com and is written by Shas Dey.
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