Looking for stocks ready to soar? Try the airline industry.
Companies in the group are beginning to report earnings results for the third quarter. Last week, we saw operating performance from American Airlines parent AMR Corp. (NYSE:AMR), Alaska Air Group (NYSE:ALK) and Southwest Airlines (NYSE:LUV). This week, we will get numbers from United Continental (NYSE:UAL) and Delta Air Lines (NYSE:DAL).
Few sectors have fared worse in 2011 than air carriers. Stocks across the board took a nosedive thanks to rising oil prices earlier in the year. The timing was unfortunate.
This much-maligned industry was just starting to get its legs. Tough negotiations with labor unions had reduced operating expense, and mergers and acquisitions eliminated excess capacity. A gradually recovering economy allowed airlines to increase ticket prices. Without higher fuel expenses, 2011 could have been a year of fantastical profits. Alas, it was not to be.
But as a result of the selling in airline stocks, the group is attractively priced today. Earnings growth in the sector is expected to be strong in 2012, and moderating oil prices will certainly help matters. Here are three names that you can buy on the cheap today, in advance of what could be strong gains for the remainder of the year and beyond:
Alaska Air Group
There is an exception to every rule. The airline industry had few winners in 2011 — one was Alaska Air Group (NYSE:ALK). Shares of this regional flyer are up an impressive 15% so far this year. Unlike its competitors, Alaska Air has figured out a way to stay profitable despite the headwinds of higher oil prices.
On Oct. 20, Alaska Air reported results for the period ending Sept. 30. Excluding jet fuel hedges that went awry, the company posted a profit of $3.58 per share, soundly beating Wall Street estimates of $3.33 per share. The record numbers were boosted by a strong load factor, indicating that planes were flying full.
You can’t blame the airline for the fuel hedge. With oil prices rising throughout the year, it was reasonable for the airline to lock in prices with hedging contracts. What is significantly more important is the impressive management of the company that resulted in traffic growth.
For the full year, the average Wall Street estimate for Alaska Air is $7.94 per share. Those profits are expected to grow by 13% in the following year, to $8.96 per share. At current prices investors can buy Alaska Air for just eight times current-year estimates. That is a cheap price considering the company has met or exceeded Wall Street forecasts for several quarters now. I would buy this stock at these prices.