Editor’s note: This article was corrected on May 7, 2019.
Shares of American Airlines (NASDAQ:AAL) and United Continental (NYSE:UAL) have barely gotten off the ground this year, with AAL stock gaining 9% and UAL only up 5% as investors fretted about the additional costs the airlines would incur from the grounding of their Boeing (NYSE: BA) 737 Max jets. The planes were blamed for two fatal crashes in Ethiopia and Indonesia might hurt their operations.
Meanwhile, Delta (NYSE:DAL), JetBlue (NASDAQ:JBLU) and Southwest Airlines (NYSE:LUV) have been cleared for takeoff. Since the start of the year, DAL is up 15% and JetBlue has increased 17%, while LUV has gained 14%. Though all of these stocks are trading under their average 52-week price, their prices accurately reflect the underlying companies’ potential growth.
AAL and UAL, though, offer compelling values for investors, even though both companies have a great deal of baggage.
Ugly Stocks Only an Investor Could Love
I’ll admit that AAL and UAL are tough to like. According to the Points Guy, Fort Worth-based American Airlines stock “continues to put up mediocre numbers in on-time arrivals, lost baggage, fees, and customer satisfaction.” Airlines in general have had numerous negative instances of staff clashing with passengers, many caught on video.
According to UAL CEO Oscar Munoz, the company’s seats are too small, and its WiFi is too slow. Not surprisingly, UAL, edged out AAL to finish at the bottom of JD Power’s 2018 North America Airline Satisfaction Survey.
Though corporate reputations shouldn’t be ignored, personal feelings need to be set aside when evaluating stocks. And when it comes to AAL and UAL, investors should note that the companies’ numbers are compelling.
Moreover, both carriers are using other types of jets to handle the workloads of the grounded Maxes, limiting the impact on their bottom lines.
Upside Surprise
When AAL reported its latest earnings, earnings of 52 cents surpassed analyst estimates of 50 cents, though revenue of $10.58 billion slightly missed estimates for $10.6 billion. UAL’s net income more than doubled to $292 million, or $1.09 per share, in its most recent quarter as revenue jumped 6.2% to $9.59 billion, according to its recently released earnings.
Another Max owner, LUV, estimated that it lost $200 million in revenue in the most recent quarter due to the groundings. Even so, overall revenue at the Dallas-based company rose a better-than-expected 4.1% to $5.15 billion. Shares of LUV are at an 11% discount to their average 52-week target of $59.06. Though LUV’s valuation is compelling, AAL and UAL both offer higher potential upside.
AAL stock trades a multiple of 6 times next year’s earnings. UAL’s multiple is 7x. AAL is currently valued at a 30 percent discount to its average 52-week price target while UAL is expected to rise 17 during the same time. No other U.S. offer the same potential upside which is why I am recommending both AAL stock and UAL stock.
Jet Fuel On The Rise
The one massive wildcard with airline stocks is jet fuel prices, which make up a considerable portion of their costs. Investors can look at the situation in a few ways.
First, jet fuel prices should be kept in check by historically low oil prices. According to data from Platt’s, as of May 3 jet fuel was fetching $85.31 per barrel, up 0.8% from the previous week and an increase of 3.1% from the last month. An optimist would note that prices are down 4% on a year-over-year basis.
American, United and the other carriers spend considerable time and efforts to hedge themselves against the fluctuations of the jet fuel market.
As of this writing, Jonathan Berr didn’t own shares of any company discussed in this post.
