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.