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JetBlue Airways Corporation (JBLU), Allegiant Travel Company (ALGT), Republic Airways Holdings Inc. (RJET): Airline Stocks Soar, But How Much Room Is Left?

Among airline stocks, JetBlue Airways Corporation (NASDAQ:JBLU) surged recently after reports surfaced that the company is being targeted for a buyout by David Neeleman, who is tipped to be contemplating a merger between JetBlue Airways Corporation (NASDAQ:JBLU) and his start-up carrier Azul Linhas Aereas. The unconfirmed news not only lifted JetBlue Airways Corporation (NASDAQ:JBLU) but also worked wonders for Allegiant Travel Company (NASDAQ:ALGT) and Republic Airways Holdings Inc. (NASDAQ:RJET). While acquisitions usually unlock huge upside, there is no assurance of a buyout happening anytime soon. Here is a closer account of which stock might be a better fit for your portfolio:

JetBlue Airways CorporationJetBlue Airways, a natural target

With its improving financial performance and attractive valuation, JetBlue Airways Corporation (NASDAQ:JBLU) is a natural acquisition target. At current market prices, the stock trades at a forward price/earnings ratio of just 9 while offering a discount of 7 percent to its book value of $6.8 per share. Its capital structure might be a little skewed in favor of interest paying debt, but it is fine as long as the company keeps its handle on costs and manages to boost top-line. A price/sales ratio of 0.35 also indicates undervaluation. In terms of financial performance, the company has been making a strong recovery on an annual basis, although the first quarter performance was below Street expectations with profits halving to $14 million despite a top-line boost. On the positive side, the company is strengthening its balance sheet. During the quarter, it reduced its debt by $25 million and repurchased a half million shares of common stock.

Republic Airways stock is up

The same palpable enthusiasm can be found in the stock of Republic Airways Holdings Inc. (NASDAQ:RJET) – an Indiana based regional airline, although the ground realities justify a measured approach by investors. The stock has moved up 8 percent over the last three days and trades close to its 52-week high as the company seems to be making some progress in spinning off its Frontier Airlines subsidiary, although no formal announcement has been made so far. A bigger challenge awaits Republic Airways Holdings Inc. (NASDAQ:RJET) on the front of signing competitive labor agreements with its employees.

This is crucial as the company has been losing out on fixed-fee contracts from bigger airlines – a necessary aspect for any regional airline to survive. While this would have an obvious impact on top-line growth, fixed costs and gearing will make sure that the net result on margins is more than proportional. This trend is already visible as the company reported an 8.9 percent drop in sales during the most recent quarter. With a debt/equity ratio of 3.9 and price hovering near its annual high, the stock is certainly not the most attractive prospect.

Small is beautiful

When economist Schumacher said ‘Small is Beautiful,’ airlines were not on his mind, but the phrase applies perfectly to this sector. Nevada-based leisure travel company Allegiant Travel Company (NASDAQ:ALGT) is among the better picks in the aviation sector. The company operates a fleet of more than 60 aircraft primarily aimed at leisure destinations and small cities. Compared to its commercial counterparts, Allegiant Travel Company (NASDAQ:ALGT)’s business involves a higher degree of seasonality but still works out in its favor, as it is largely free of unprofitable commercial commitments. This is visible in its margins as well. For the latest reporting period ended March 31, the company’s net profit jumped 47 percent to $31.9 million, translating into a margin of 11.7 percent, up from 8.6 percent for the full year 2012. Allegiant Travel Company (NASDAQ:ALGT)’s stock has surged 12.7 percent over the last month but still trades at an attractive forward earnings ratio of 16.7.

Foolish bottom line

If one has to take a fundamental call in the sector, Allegiant Travel Company (NASDAQ:ALGT) and JetBlue Airways Corporation (NASDAQ:JBLU) are among the better plays. Both are strong financially but JetBlue Airways Corporation (NASDAQ:JBLU) appears fully valued for commercial airlines. On the other hand, Republic Airways Holdings Inc. (NASDAQ:RJET) comes with a debt pile and labor issues and thus is best avoided.

The article Airline Stocks Soar, But How Much Room Is Left? originally appeared on Fool.com.

Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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