Richard Branson once said that to become a millionaire, start with a billion dollars and buy an airline. But with industry consolidation, increased efficiency and expanding markets, industry prospects have brightened. Here several MoneyShow.com contributors offer their top picks among U.S. airlines.
There's a lot to like about Delta Air Lines (DAL) stock right now. It is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. The company participates in multiple joint ventures with foreign airlines, and recently increased its stake in Mexico's Grupo Aeromexico (GRPAF) to 49%.
Delta Air Lines was named "World's Most On-Time Airline" in 2017 by FlightGlobal. Despite increased fluctuations in 2018 energy prices, Delta expects to achieve margin expansion in late 2018, contributing to annual profit growth.
Wall Street expects Delta's non-GAAP earnings per share (EPS) to grow from $4.93 in 2017 to $5.59 in 2018 and $6.64 in 2019, reflecting very strong EPS growth rates of 13.4% and 18.8% in 2018 and 2019.
It's important for investors to know that consensus EPS estimates change frequently for airline stocks, with the price of airline fuel being a big factor in the constant adjustments. So the important thing to focus on with Delta is that it's a very profitable company, and that profits continue to grow at a brisk pace.
Delta Air Lines is both a growth stock and a value stock -- with a yield of 2.4%. The stock's 2018 and 2019 price/earnings ratios are quite low at 10.4 and 8.8, respectively, leaving lots of room for share price increases before anybody would consider the stock to be overvalued.
Southwest Airlines Co. (LUV) operates a passenger airline that provides air transportation services in the U.S. and near-international markets. It serves 101 destinations in 40 states; Washington, D.C.; and Puerto Rico and also eight other countries, including Mexico, Jamaica, the Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize and Cuba.
Patience is paying off. After sitting at a loss for several months, we're looking at double-digit profits on this one. The dividends it pays help out, too. But a lot of that movement has been from the shares -- capital appreciation. And that'll continue.
JetBlue (JBLU) just announced that it would be hiking its prices. That leaves Southwest Airlines as the only quality discount carrier in the country. And it's not just flying in this country, either. Central America and the Caribbean have long-been stops on Southwest's routes, capturing billions in Spring Break dollars. And the company recently added flights to and between the Hawaiian Islands.
Already, our neighbors up north can benefit from Southwest's best-in-class service and super-low prices. Yep, we're flying to Canada. And with flights already going to Hawaii, I wouldn't be surprised to see that become a hub for Asian flights.
And I wouldn't be surprised to see Southwest head east to start offering discount fares to and from Europe. The stock is now rated a Buy anywhere below $70 per share. Keep adding shares below that limit. Our 12-month target price is $95.
The market has been remarkably resilient. However, I think what will finally be the downfall of this bull market is an adjustment for earnings estimates for 2019. If estimates decline, while at the same time the Fed keeps hiking rates, then a 10% to 15% correction is possible. So investors need to think in terms of defense.
One idea that could survive a future correction is Alaska Airlines (ALK) . The stock is down more than 30% from its March 2017 high, when it traded over $100. Three issues drove the decline, including higher fuel prices, increased industry capacity and Alaska Airlines having trouble integrating the Virgin America acquisition.
However, the outlook for all three challenges appears to be improving. Fuel prices are leveling, capacity additions are moderating and Alaska Airlines costs from the acquisition are moderating, with cost per available seat miles only 2% last quarter. These factors should drive per-share earnings improvement from $4.15 this year to over $6.00 next year. The stock is cheap at 11 times forward earnings estimates.
United Continental (UAL) is no secret to anyone, with the firm's massive fleet of planes (768 mainline aircraft and 554 regional aircraft by year-end; total fleet up 4.7% from year-end 2017) shuttling millions of passengers around the globe.
Industry consolidation (less competition) and an avoidance of price wars helped United and other peers see earnings boom from 2013 through 2015, though the past few years have seen earnings level out (albeit at high levels). Now investor perception is improving, with already-elevated earnings beginning to push higher (with more likely to come) thanks to a strong economy, moderating fuel prices and, for United Continental, its continued fleet expansion.
For 2018, the company sees total capacity rising nearly 5% and traffic growing faster than that, leading to big earnings (north of $8 per share) and free cash flow (already totaling $2.4 billion in the first six months of the year). With continued modest price and traffic hikes (the firm just upped its checked baggage fee to $30 from $25), analysts see earnings up around 20% both this year and next.
Airline stocks aren't exciting, but when they get going they can really move -- United Continental's last uptrend took it from $30 in March 2013 to $75 by January 2015. After that, it was a very long slog (shares were at $73 in July of this year), but the earnings gap in July and relatively persistent upside since then looks like a change in trend. We think dips are buyable.
Meanwhile, Spirit Airlines (SAVE) is the largest ultra-low-cost carrier in the country, with more than 500 daily flights to 67 destinations (including 88% of the top 25 U.S. metro areas). The attraction here is price -- Spirit claims its airfare is 35% cheaper than the average competitor because of its cost structure (high seat density airplanes, high aircraft utilization, efficient use of gates, etc.), and the firm relies more on ancillary revenue (which is less susceptible to price wars) than its peers.
And management thinks its cost advantages will only grow during the next few years! As for the stock, it's strong partly because investors think the sector as a whole is turning the corner, and for Spirit in particular, because new capacity and costs getting under control is leading to accelerating revenue growth and (soon) a pickup in earnings.
For the year, Spirit anticipates total capacity to be up a whopping 23%, while revenue per seat mile flown is expected to pick up starting in the current quarter. While earnings took a hit last year and should be flat this year, the bottom line should grow north of 20% in the third quarter and nearly 30% for all of 2019. Throw in a strong environment for consumer spending and a reasonable valuation (15 times earnings) and we think the stock can have a good run.
Spirit Airlines has had a rough few years, topping at $85 back in 2014, falling to $33 a year later and actually tapping a new correction low of $30 about a year ago. But after multiple successful tests of the $35 area this year, the stock has not only perked up, but begun to advance persistently -- the shares have risen in a straight line since early July and are reaching their highest level since last July. We think dips or shakeouts will lead to higher prices.
Allegiant Travel Company (ALGT) is a discount airline operating in a niche connecting smaller metropolitan markets to popular vacation destinations. Its biggest destinations are Orlando and Las Vegas. The company's strategy is to fly large aircraft with relatively low frequency in each served market.
It utilizes its fleet less efficiently than other major airlines but makes up for this by flying cheaper planes and operating from less expensive airports. It also books business directly from customers, rather than sharing revenue with travel aggregators. Taking a page from the deep discounters, Allegiant also upcharges for snacks, seat reservations and other niceties that come standard with the mainline carriers. It also operates some charter flights.
The shares have underperformed the market badly over the past three years. Part of the problem is that Allegiant seems to be close to saturating its natural market opportunity. Labor relations have been rocky. And earlier this year, a 60 Minutes report impugned the company's safety record. Volatile fuel prices are also a risk.
Allegiant has a differentiated niche in the small markets it serves. Combine that with a steady record of past success and a moderate valuation, and this may be an opportunity to make money where other investors fear to tread. Allegiant also returns capital to shareholders. The share count is down 18% in the past five years. The company pays a dividend of $2.80 annually.
We model 12% compound EPS growth, which would generate EPS of $15.10 in five years. For a low price, we apply a low P/E of 13.4 to EPS of $7.49, which is adjusted for a normalized tax rate of 25%. This yields a low price of $100. That figure, combined with a high P/E of 20.1, generates a high price of $304. On that basis, the upside/downside ratio is 5.3 to 1. With dividends, the compound annual return could be 19%.
SkyWest (SKYW) and rival airlines have hit some turbulence this year, hurt by concerns that higher fuel costs will weigh on earnings. Worries that increased capacity would boost empty seats and crimp pricing have also hurt the group.
With some 3,000 daily departures, SkyWest and its subsidiary Express Jet operate flights under code-sharing agreements with major airlines. Leaner operations are helping boost profits. A fleet transition that began in 2014 is expected to be completed this year, providing SkyWest with a smaller but more profitable network.
Since 2014, the air carrier has removed some 200 less profitable aircraft and added more than 80 new, larger planes. In August, SkyWest had 90,600 departures, and passenger load factor (capacity utilization) improved to 82.4%. Importantly, profit estimates are rising. The consensus estimate anticipates 44% higher per-share earnings for 2018. Earning a Value score of 79, SkyWest is a Best Buy.