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.

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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.

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