Am I Crazy to Like Airline Stocks Here?

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Airline stocks including Southwest (LUV), United Continental (UAL) and Delta Air Lines (DAL) are all off by double digits this year after lifting off (pardon the pun!) in 2013 and 2014.

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But am I crazy to think that this pullback, coupled with persistently cheap oil, presents a buying opportunity?

Yes, the Department of Justice has subpoenaed a few of the majors for allegedly fixing prices to minimize capacity increases, and that’s a risk.

Also, considering UAL stock has doubled and both LUV and DAL have tripled since early 2013, it isn’t unreasonable to believe airlines have gained everything they’ve had to gain.

But just look at these valuations:

  • Delta: Forward price-to-earnings ratio of 8.3 and a forward price-to-sales of about 0.8
  • Southwest: Forward P/E of 9.8 and P/S of 1.15.
  • United Continental: Forward P/E of 6.4 and P/S of 0.6

To top it off, a recent study by trade group Airlines for America showed carriers are expected to serve 222 million passengers this summer, which would beat the record of 217.6 million passengers in summer 2007 before the financial crisis ruined things!

At the same time, the Dallas Morning News estimates that U.S. passenger airlines booked their first ever quarter with over $5 billion in net income — about $5.3 billion in adjusted profits to be exact, up dramatically form $4 billion from the group in 2014.

I understand that a highly regulated industry like airlines has limited potential for profits and margin expansion. I also understand the continued history of bankruptcy and insolvency that seems par for the course among airline stocks.

Call me crazy, but it seems like there are real reasons to be bullish on airlines.

Select carries like JetBlue (JBLU) have defied gravity — thanks in part to recent earnings that more than doubled year-over-year. Revenue increased about 8% in Q2, too, as did the passenger miles traveled. In large part, performance like this is why JBLU stock is up 45% year-to-date as the other airlines continue to suffer.

But how do you explain Spirit Airlines (SAVE) — a similarly low-cost carrier that continues to meet Wall Street’s earnings demands, and should see revenues jump 13% this year and then an additional 21% in 2016, according to projections?

There is clearly a lot to digest here, including the impact of a strong dollar on the big carriers or hedging against crude oil or even the prospect of labor disputes and pension pain.

But the industry looks to be going strong and boasts a lot of value in certain carriers.

So what am I missing? Am I crazy to like airline stocks on this pullback?

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/airline-stocks-luv-ual-dal/.

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