Over the past decade, the airline industry has had more than its fair share of problems, as commercial airliners have posted $58.5 billion in combined losses, while slashing nearly 200,000 jobs. Interestingly, the industry as a whole has returned nearly 15 percent in 2012, outpacing all three major American indices. This growth in shareholder value has been attributed to a decreased cost structure, efficiency gains through various mergers, and an ongoing economic recovery in the U.S. Nonetheless, there are some clouds on the proverbial horizon, as rising fuel prices and fears of a deepening Eurozone crisis may cause investors to take their gains in the not-so-distant future.
In North America, the five major airliners in order of largest-to-smallest market caps are: Delta Air Lines (NYSE: DAL), United Continental (NYSE: UAL), Southwest Airlines (NYSE: LUV), US Airways (NYSE: LCC), and JetBlue Airways (NASDAQ: JBLU). Investors holding these five stocks in their portfolios have been flying high this past month, as each has returned an average of 18.1 percent. American Airlines, a subsidiary of AMR Corporation (OTC: AAMRQ.PK), is not included in this list, as it is still wading through an ongoing bankruptcy. While diversification is always the best strategy for longer-term investors, it may be wise for those with shorter time horizons to consider each of these five airliners separately, as there are a few fundamental differences that arise. Additionally, hedge funds have differing sentiment on these stocks, and it’s never the worst strategy to ape the world’s most successful money managers – assuming background analysis is performed too.
Looking at the top-line, these five companies have mixed results, as 3-year average revenue growth rates are as follows: UAL (22.5%), DAL (15.7%), LUV (12.4%), JBLU (10.0%), and LCC (2.5%). In total, revenues eclipsed $105.45 billion in 2011, with United and Delta accounting for 7 out of every 10 dollars in these five companies’ pockets. In this case, it is modestly surprising that the two fastest growing airliners also are the largest. Companies with this combination of growth and sheer size are typically good investments to consider, though further evaluation is necessary.
In terms of earnings per share figures, both United and Delta finished 2011 with EPS’s of $2.26 and $1.01 respectively. In comparison to LUV (0.23), JBLU (0.28), and LCC (0.44), these figures are solid. More importantly, however, it’s essential to see how investors are valuing these earnings through use of the P/E ratio. In UAL’s case, an earnings multiple of 15.1X signals that the company is slightly overvalued in comparison to the industry average (14.5X) and DAL (7.2X). In fact, DAL is the most undervalued airliner out of the five mentioned above – its P/E is also below LUV (23.3X), JBLU (15.1X), and LCC (8.2X). Supporting this claim, forward P/E ratios tell a similar story. With a forward P/E of 4.2X, Delta’s future earnings are valued at a lower rate than all but those of LCC (4.1X).
In terms of cash flows, it looks like Delta might be in the best position yet again, as its current operating cash flow of $2.8 billion dollars is second-to-none, while its free cash flow of $1.6 billion is almost on par with United. In recent weeks, it has been speculated that DAL is the frontrunner to acquire the bankrupt American Airlines – a move that would build on the company’s 2010 acquisition of Northwest, which gave DAL possession of the largest commercial fleet in the world. Using the P/CF ratio, DAL’s enormous cash hoard looks undervalued at the moment, as its current cash flow multiple of 3.3X is below the industry average of 4.5X. Surprisingly, this is also lower than UAL (6.1X), LUV (3.8X), and LCC (3.6X) despite DAL’s aforementioned advantages.
Thus, it seems that Delta may be the best airline stock to buy at the moment – a conclusion that is supported when looking at hedge fund activity. As of the end of last year, 41 hedge funds held long positions in DAL, compared to just 33 for UAL, and less than 30 for LUV, JBLU, and LCC each. The most prominent fund managers holding DAL are the duo of Paul Reeder and Edward Shapiro, Ken Heebner, John Griffin, and Anand Parekh, all of whom have at least $2 billion in assets under management. Whether its Delta’s undervaluation, merger potential, or strong revenue growth, it may be wise to follow the hedge fund sentiment and take a long position with Delta Air Lines (DAL).