by Jamie Dlugosch | October 24, 2011 6:00 am
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[1]), Alaska Air Group (NYSE:ALK[2]) and Southwest Airlines (NYSE:LUV[3]). This week, we will get numbers from United Continental (NYSE:UAL[4]) and Delta Air Lines (NYSE:DAL[5]).
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:
There is an exception to every rule. The airline industry had few winners in 2011 — one was Alaska Air Group (NYSE:ALK[2]). 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.
Shares of Delta Air Lines (NYSE:DAL[5]) have been hit hard this year. The stock is down a whopping 32%. With that decline, one might think Delta is in complete disarray, but that is far from the truth. In fact the only blip for the company on an operating basis was the second quarter, when the company missed Wall Street estimates by the proverbial penny per share.
The flip side of that miss was a significant beat in the first quarter. The company beat Wall Street average estimates by 12 cents per share in the period ending March 31. Earnings might be a bit volatile thanks to oil price fluctuations, but Delta is solidly operating in the black.
For the full year, the company is expected to make $1.11 per share. Wall Street is looking for nearly double that amount in 2012, when the average estimate is $2.06 per share. That is a big jump in profits that investors can buy for a ridiculously low eight times 2011 estimated earnings.
I expect the stock to begin its ascent with a strong report this week. For the quarter ending Sept. 30, the average Wall Street profit estimate is 93 cents per share. Look for Delta to beat that number, excluding any losses due to hedging contracts going wrong. The bottom line is that planes are flying full and airlines just this week announced ticket price increases that are likely to stick. To the extent oil prices moderate for the remainder of the year and beyond, DAL shares could double in value from current prices.
A near mirror image of Delta — in a very positive way — is United Continental (NYSE:UAL[4]). Like those of Delta, United shares are down in 2011 — 15% in this case. That is significantly better than the 30%-plus losses for Delta, but it still offers investors today an opportunity to buy on the cheap. Perhaps helping United is the fact the company has beaten Wall Street estimates in each of the past four quarters.
With that strong performance, estimates for the period ending Sept. 30 have been climbing over the last 90 days. Three months ago, the estimate for profits was at $1.94 per share. Today, Wall Street analysts are looking for $2.08 per share. They are likely to be proven correct Thursday.
For the full year, United is expected to make a profit of $3.74 per share. That number jumps 37% in 2012, to $5.13 per share. At current prices, United trades for just five times current-year estimated earnings. I would challenge you to find another stock expected to grow profits at such a rate while also trading for such a low valuation. I would buy UAL at these levels.
As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.
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