I believe that when Warren Buffett sold his airline stocks, it was the peak of bearish sentiment for the industry. That said, the industry outlook and sentiments have gradually improved. However, valuations are still mouth-watering from a long-term perspective. And with fear still being the dominant sentiment related to airline stocks, it’s a good time to buy some quality names.
Before looking at individual stocks, its worth mentioning here that passengers are slowly returning. Airlines are therefore increasing their flights, and this is a silver lining for the industry. And as airline capacity trends higher, airline stocks are bound to move higher.
Having said that, a small exposure to the industry is advisable than a big plunge. In fact, it’s expected that for fiscal year 2020, airline losses will top $84 billion for a net profit margin of -20.1%. Additionally, for the next year, losses are likely to narrow to $15.8 billion for a net profit margin of -2.6%. So, clearly, recovery will be gradual.
In-sync with this expectation for the industry, airline stocks will gradually trend higher. Therefore, let’s look at four stocks that are worth holding:
- JetBlue Airways (NASDAQ:JBLU)
- Delta Air Lines (NYSE:DAL)
- Southwest Airlines (NYSE:LUV)
- Alaska Air Group (NYSE:ALK)
So, let’s dive in.
Airline Stocks to Buy: JetBlue Airways (JBLU)
Among smaller names in the airline industry, I like JBLU stock. The stock has been in a consolidation mode as of late, but can potentially trend higher from current levels.
Moreover, with cash burn likely to sustain in the coming quarters, the first factor to analyse is the financial flexibility. As of second quarter of 2020, the company reported $3.4 billion in liquidity. Furthermore, the company’s adjusted debt-to-capital ratio was low at 55%. This provides ample headroom to leverage in these challenging times.
Its also worth noting that the company reported an average daily cash burn of $9.5 million at the end of second quarter of fiscal year 2020. And given the current liquidity position, the company can survive several quarters of cash burn. At the same time, as passenger inflow gradually increases, cash burn is likely to decline further.
Therefore, JetBlue Airways is well-positioned to survive the headwinds and gradually grow in the coming years.
Delta Air Lines (DAL)
DAL stock is also attractive from a long-term perspective with the company well-positioned to survive the current headwinds. The stock has also been in consolidation mode in the last few months, and provides a good entry opportunity.
In terms of liquidity, the company is also in a great spot with a total cash buffer of $15.7 billion at the end of Q2 2020. An important point to note is the company’s aggressive effort to reduce cost in the last few months.
To put things into perspective, Delta Air Lines reported a daily cash burn of $43 million for Q2 2020. However, cash burn reduced to $27 million for June 2020. And with the company expecting that it will take more than two years before a sustainable recovery, cost reduction is a big positive. Reduction in planned capital expenditure by $3.5 billion will also help in conserving liquidity.
Overall, Delta Air Lines is a quality name in the airline industry. And prior to the crisis, the company had been accelerating operating cash flow generation. So once the current challenges are navigated, value creation will continue — making Delta one of the top airline stocks out there.
Airline Stocks to Buy: Southwest Airlines (LUV)
LUV stock has outperformed other airline stocks during the novel coronavirus pandemic. In turn, this is an indication of the point that the company is among the best in the sector.
To elaborate, Southwest Airlines is the only company in the industry to have an investment-grade credit rating. As of Q2 2020, the company reported $14.5 billion in liquidity. Furthermore, with unencumbered assets of $12 billion, I don’t see any financial stress for the company.
Moreover, daily cash burn is another important indicator of the capability to survive the crisis. That said, the company’s average daily cash burn was $18 million per day for Q2 2020. However, during June 2020, the daily cash burn had declined to $16 million.
With potentially higher capacity in the coming months and efforts to reduce cost, I expect daily cash burn to be lower. And if the company can achieve break-even cash flows in the next few quarters, LUV stock is likely to surge.
Additionally, it’s worth noting that Southwest Airlines is also a market leader in 23 of the top 50 U.S. metro areas. So with a strong domestic presence, coupled with robust fundamentals, LUV stock is worth holding in your portfolio.
Alaska Air Group (ALK)
Last month, JP Morgan analyst Jamie Baker provided an “overweight” rating on ALK stock with a price target of $55. This implies a 58% upside from current levels of $34.80. So clearly, the stock is attractive and the sideways movement is an opportunity to accumulate.
From a fundamental perspective, there are ample reasons to back this bullish view. The company reported a debt-to-capitalization-ratio of 51% as of Q2 2020. This provides ample headroom for leveraging. Additionally, the company also reported cash and equivalents of $3.8 billion as of July 2020.
Another big positive is the sharp reduction in daily cash burn from $400 million per month in March 2020 to $120 million in June 2020. In turn, aggressive cost reduction will help in keeping the company’s credit profile strong.
Moreover, even amidst the coronavirus triggered challenges, the company announced 12 new routes during Q2 2020. Overall, Alaska Air is a quality name in the airline industry with strong fundamentals. And once the current headwinds are navigated, ALK stock will trend higher.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.