US Airways: Is It A Buy?

The potential merger of US Airways Group, Inc. (NYSE:LCC) with currently bankrupt American Airlines, which US Airways has been pursuing for months, remains on the tarmac. US Airways hopes that a merger would give the company a stronger international presence, and the entire industry would likely see weaker price pressures as competition decreases. Thus far the company retains critical support from American’s unionized pilots, who are dissatisfied with American’s leadership; in fact, the pilots are reportedly rejecting offers from their employer in order to force management into a merger deal.

But US Airways Group, Inc. seems to be doing fine on its own. Its recent data for September showed that its passenger load factor, a key operational metric, was up for the month. Coupled with lower oil prices, shares of the airline were sharply up the day of the announcement. Going back to the company’s second quarter of the year, revenue was up 7% compared to the same period a year earlier and earnings roughly tripled to $306 million. On a trailing basis, US Airways Group, Inc. trades at a P/E multiple of 5, and that’s before the apparently good results this quarter roll in to replace the 51 cents per share in earnings the company got in Q3 2011. And every business school student has it pounded into their head that mergers tend to destroy, not create, shareholder value. We’re concerned about the potential for rising oil prices that will squeeze the airlines on fuel costs, but in order for that scenario to occur we would likely need to see strong global growth and a slowdown in the oil and gas boom in the U.S.

DUQUESNE CAPITAL

Billionaire Stanley Druckenmiller thought as much during the second quarter. He initiated a position of 3.7 million shares in the airline (see more stock picks from Stanley Druckenmiller). Fellow billionaire David Tepper also liked the stock: his fund, Appaloosa Management, added shares and owned nearly 13 million at the end of June. It was the fifth largest position in market value listed on Appaloosa’s 13F filing at that time (find more of David Tepper’s largest stock positions). Airlines in general are starting to see a pickup in interest from value investors. Read about other airlines seeing investments from hedge funds.

Those peers in the airline industry include United Continental Holdings Inc (NYSE:UAL), Delta Airlines, Inc. (NYSE:DAL), Southwest Airlines Co. (NYSE:LUV), and Spirit Airlines Incorporated (NASDAQ:SAVE). Really, the whole industry looks cheap, at least on a forward basis. United Continental and Delta, which carry P/Es of 5 and 4 respectively, join US Airways (whose multiple is also 4) on one tier. United Continental’s earnings were down in the second quarter versus a year earlier, and its revenue was about flat; we don’t think it’s as good a buy as US Airways. Spirit’s forward P/E is 8, while investors’ relative darling Southwest trades at 10 times expected earnings for 2013. Spirit and Southwest are somewhat justifiably priced higher than the other airlines on the basis of recent growth, which would be expected to continue. Southwest’s earnings rose over 40% last quarter compared to the same period in the previous year, while Spirit’s roughly doubled. On a trailing basis, it’s actually Spirit which joins Delta as having a relatively low earnings multiple- 12 and 9, respectively- while United Continental and Southwest’s P/Es are closer to 20. Overall Spirit could be a good buy if an investor expects its growth to continue. Southwest, however, seems overpriced compared to the rest of the industry even though its forward multiple is not bad in absolute terms.

Out of all these peers, the closest to joining US Airways as a good buy is Delta: it is slightly more expensive, and would not face integration risks from a US Airways-American merger while still benefitting from seeing a player leave the industry. We still like US Airways as a value stock, but think Delta is only slightly more expensive and that the entire industry may be undervalued.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!