In November 2016, Warren Buffet’s Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) revealed that the group had taken a stake in the four major U.S. airlines: American Airlines (NASDAQ:AAL), United Continental Holdings (NASDAQ:UAL), Delta Airlines (NYSE:DAL) and Southwest Airlines. This rather unexpected investment by the legendary investor brought the industry into the limelight, while many analysts predicted strong performance by most airline stocks.
Since then the returns of many of the airline stocks have been mixed as various economic developments have dominated the headlines, including interest rate moves by the Federal Reserve, the continuing U.S.-China trade war worries, the decline in the stock markets in the third quarter of 2018 and a remarkable recovery in the broader markets and many individual stocks so far in 2019.
However, most airline stocks have not fully participated in the stock market recovery we witnessed in Q1. As we start another earnings season, many analysts are wondering what may be next for the airline industry in the coming quarters. Today I’d like to discuss why I am getting ready to take a close look at the positive long-term prospects of three airline stocks: Delta Airlines (NYSE:DAL), Spirit Airlines (NYSE:SAVE) and LATAM Airlines Group (NYSE:LTM).
Delta Airlines (DAL)
Shares of Delta Airlines stock have started April on a high note. DAL went up from a close of $51.55 on March 29 to an intraday high of $57.57 on April 3. The surge in price followed the upbeat guidance the airline issued. The Atlanta-based airline carried a record 17.6 million passengers in March, and the average available seat miles (ASM) increased 5.4% year-over-year to 22.9 million.
This strong guidance follows an already strong Q4 that DAL reported in January. DAL stock currently trades at a trailing P/E of 10.1, a number that should catch the attention of value investors. And anyone who buys Delta shares can enjoy dividend income, which now stands at a yield of 2.46%.
If you also pay attention to technical charts, DAL stock price is now over its 200-day moving average, a sign of bullish momentum. High volume accompanied the price surge in the first four trading days of April, another bullish sign.
However, Delta’s technical momentum indicators, which describe the speed at which prices move over a given period, are currently in overbought territory. Although these indicators can stay overbought for quite a long time, short-term profit taking is probably around the corner. As the company is expected to release earnings on April 10 before the bell, there might be increased volatility in the coming days.
Before this recent up move, Delta stock had been forming a base between $47.50 – $52.50, a level that now acts as a support zone. In case of a decline in DAL’s price decline, this area should continue to act as major support where long-term investors may consider hitting the “buy” button.
Spirit Airlines (SAVE)
Over the past year, the stock price of the ultra-low-cost carrier Spirit Airlines is up 45%. Earlier in 2018, SAVE stock struggled as revenue per available seat mile (RASM) declined by 4.6% for the first half of the year. Increased fuel costs also raised question marks over Spirit’s margins and profitability. However, the results for the second half of 2018 were overall much better and investors began to cheer that the multiyear turnaround effort would likely pay off. The airline also increased operational performance, including on-time performance.
Then on February 5, Spirit Airlines further reported strong financial results for Q4 and full year 2018 results. Its adjusted earnings per share jumped 89% to $1.38. Analysts noted that the airline has been keeping a tight control on non-fuel costs, a fact that helped improve margins. SAVE is currently valued at about 8x forward earnings per share, giving further optimism that the group is set up well to grow earnings per share nicely from here.
In Europe, the past decade has seen the success of ultra-low-cost carriers, such as Ryanair (NASDAQ:RYAAY) and easyJet (OTCMKTS:ESYJY), which have consistently had double-digit growth, especially in their early years. SAVE has been following in the footsteps of these European airlines as it focuses more on niche markets where it does not have to compete with other large network airlines fully. In other words, ULCCs are increasingly becoming a disruptive force in the industry and Spirit stock price is likely to reflect the organic growth potential the airline has positively.
If you follow technical price charts, in 2018, SAVE stock found support around $35, from which the shares have made a new sustained leg upwards. The airline is expected to release earnings report on April 25. As other airlines are also due to report during April, there may be volatility and some profit-taking in the sector and Spirit stock. In case of a price decline, the SAVE stock is likely to find support around $50, a level which may serve as a possible entry point for long-term investors.
Latam Airlines (LTM)
In 2012, LAN Airlines and TAM Linhas Aereas merged to form LATAM Airlines. The Chile-based group now serves 140 destinations in 25 countries, operating more than 1,400 flights a day and transporting 67 million passengers a year. In other words, management has been able to increase operational efficiencies through this merger and to create a brand that has caught the attention of Latin American customers.
Year-to-date, Latam stock is up 7.7%. On April 4, it closed at $11.10. However, 2018 was not a rewarding year for the shareholders, partly because of operational difficulties due to a long strike that affected the airline. The rise in crude oil prices also led to an increase in its operating costs. Yet when the company reported earnings for Q4, investors noted that the company was becoming more efficient and was on good track to maintain profitability and achieve growth.
LTM’s net annual income of almost US$182 million for 2018 was the highest level since 2012. Its operating margin increased to 10.6%, a growth of 0.8% compared with the same period last year. Latam continued to expand the fleet and add new routes in 2018, such as the only direct route from Latin America to Israel. The airline also has a travel benefits agreement with Banco Santander-Chile (NYSE:BSAC) which rewards Chile-based passengers for their continued travels on LTM.
When evaluating stocks, in addition to looking at various fundamental metrics, I also pay attention to possible future changes and trends within a geography or society. As travel demand in Latin America grows due to demographic developments, Latam Airlines will be in a robust position to capitalize on its current market dominance and it is poised for further growth. Within two to three years, investors who buy Latam stock around the current share price are likely to be rewarded handsomely. As such, it is a standout among other stocks to buy for those with a focus on Latin America.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.