These Airline Stocks Can Add Some Lift to Your Portfolio

For decades, airlines were derided as money-losing ventures. Following years of deregulation, consolidation, technological advances and global expansion, the sector has flown to new heights. Several top investment experts -- and contributors to MoneyShow.com -- discuss their top bets on the airline sector. Crista Huff, Cabot Undervalued Stocks Advisor Southwest Airlines has been in the news for lots of reasons lately. The company is taking its mechanics union to court amidst longstanding enmity relating to contract negotiations. In addition, the U.S. Federal Aviation Administration has approved Southwest's request to begin service between California and Hawaii. Rumors have also surfaced that CEO Warren Buffett of Berkshire Hathaway might be planning to purchase Southwest -- the entire company. I've outlined this possibility in the past. To recap, Buffett has repeatedly expressed an active desire to make a large acquisition; Berkshire has enough money on hand to buy a large company; Berkshire recently owned roughly 7% to 9% of the outstanding shares of four major airlines; and Buffett had previously identified Southwest as an airline that held his interest. Southwest Airlines is an undervalued growth stock. I was waiting for a pullback so that I could recommend the shares. The pullback was quick and I have now moved the stock from a Hold to a Strong Buy rating. Delta Air Lines , with a yield of 2.8%, is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. The stock is an undervalued growth & income stock. Analysts expect EPS to grow 15.2% in 2019. The 2019 P/E is 7.7. Early March comments from CEO Ed Bastian reaffirmed full-year 2019 earnings guidance, citing strong spring and summer demand, and alleviating investor worries that the U.S. government shutdown had harmed profitability. In addition, Mr. Bastian raised full-year revenue guidance to a range of 4-6% growth. The most recent Thomson Reuters consensus revenue estimate reflected just 4.0% growth. Wall Street will therefore be revising research reports to a more bullish stance, providing encouragement to institutional investors. The fundamentals look great and the stock is just beginning a new run-up. I rate the stock a Strong Buy in our model growth & income portfolio. Richard Moroney, Dow Theory Forecasts and Upside The transportation group's P/E ratio currently ranks in its cheapest quintile. And within the transportation group, the airlines are among the cheapest versus historical norms. When their trailing P/E ratios have been in the lowest quintile, as they are now, they have averaged 12-month returns roughly double their average over all periods. Dow Theory Forecasts and sister publication Upside recommend SkyWest . The company has a market value of around $2.9 billion, ranking among the smallest airlines in the S&P 1500 Index. Founded in 1972, SkyWest uses smaller, low-cost airplanes to transport passengers between major hubs and smaller cities. SkyWest mostly operates its flights under code-sharing agreements with large U.S. airlines, which pay the company a fixed rate and some operating expenses, such as fuel. SkyWest shares appear to have a long runway for more gains. At a recent 11 times trailing earnings, the stock trades at a 22% discount to its five-year median. With management forecasting low-double-digit profit growth in 2019, the consensus expects per share profits to climb 11%, lagging the airline industry's average of 23% projected growth. But analyst estimates are up sharply over the past 30 days. SkyWest, earning our overall quantitative score of 97 out of 100 and earns our Best Best rating in Upside. Ian Wyatt, Million Dollar Portfolio 2018 was a choppy year for the airline business; high oil prices weighed on earnings for much of the year, while investors were also pricing in an elevated recession risk. Alaska Air Group was no exception, only gaining about 0.5% over the course of 2018. Like every other airline, it suffered from high oil prices and shaky investor confidence. It was also dealing with its Virgin America merger, announced in 2016. Virgin continued to operate its own flights until last April. And flight crews are still being trained on Virgin's Airbus A321s and Alaska Air's Boeing fleet. Operationally speaking though, 2018 wasn't a bad year for Alaska Air Group. Fourth-quarter net income came in at $23 million, which was on the low side because of merger-related costs. Excluding those costs, net income would have been $93 million, well ahead of the $88 million from the same period last year. Full-year net income totaled $437 million, though it would have been $554 million excluding merger costs. Alaska Air's passenger revenue grew by 6% in the quarter, and by 5% over the full year. Impressive as that is, the airline also repurchased 776,186 shares of stock and paid down debt. It reduced its debt-to-capitalization ratio to 47%, compared to 53% in 2017. The icing on the cake was a 9% increase in Alaska Air's quarterly dividend, up from $0.32 to $0.35 per share. The bump was funded through strong free cash flow. Overall, Alaska Air's total revenue is expected to rise about 6.4% this year, while analysts are looking for a 50% increase in earnings. The consensus 2019 earnings per share is now $6.64. That's not to say there aren't any risks. Higher fuel costs and increasing competition could both be a drag on profits. Still, Alaska Air has coped with both of those before, so I wouldn't expect it to be catastrophic. All in all, Alaska Air Group is a great example of a well-run, low-cost airline. Jim Corridore, CFRA Research's The Outlook An analysis of Q4 results shows that airlines are seeing strong fundamental demand. Of the eight U.S. airlines in our equity coverage universe, revenue growth averaged 10.5%, adjusted net income grew an average of 31% and adjusted EPS grew an average of 37%. Seven of the eight companies beat consensus EPS results, with the eighth, Spirit, meeting expectations. These results were aided by what we see as solid fundamental demand, as evidenced by solid passenger growth, higher average fares and rising revenue yields. Results were also aided by a lower effective tax rate following the passage of tax cuts in late 2017. Stronger results came despite higher fuel costs in the first two months of the quarter, with a decline coming in the month of December. American Airlines , Alaska Air , Spirit Airlines and United Continental receive our 4-star buy rating (on a scale of 1 to 5). Delta Air Lines earns our highest 5-star buy rating. Our overall view of demand is that both business and leisure travelers will likely continue to fly in 2019, based on solid economic growth, good consumer confidence levels and the possibility of higher tax cuts for consumers, along with strong corporate profits, which should lead to business travel growth. Airlines have been focused on getting pricing higher; unit revenues in Q4 rose by an average of 4.3%, with Spirit experiencing the most growth at 11.4% and American the least at 1.7% (Allegiant did not disclose unit revenue numbers). Unit costs rose as well, but most airlines were able to offset cost pressures. We see fare increases as likely, and supportive of revenue and profit growth. We see full flights making it possible for fare increases in 2019. While airlines increased capacity 4.4% for the trailing twelve months ended in November 2018, according to statistics from the U.S. Department of Transportation, the number of passengers increased at a faster pace, rising 4.8% over that same period. As a result, passenger load factor, a measurement of how full planes are, on average, increased modestly, by 35 basis points to 83.34%. We think the overall level of passenger load factor at greater than 83% is very full and will likely allow airlines to use yield management techniques to get fares higher, both by raising fares as well as by holding higher fare categories open longer to wait for business travelers and late bookers (who tend to pay a lot more last minute). We forecast available seat miles (ASMs, a measure of capacity), up by about 4% in 2019, but see revenue passenger miles (RPMs, a measure of how many passengers are flying) rising by 4.5% which should drive passenger load factor up by a further 39 basis points. We see similar trends likely for 2020, though visibility that far out is difficult. Oil prices are likely to provide cost relief. Oil prices have been volatile. WTI crude oil averaged $65.06 a barrel in 2018, according to data from the U.S. Energy Information Administration (EIA) -- a 22% increase over the average for WTI oil for 2017. Airlines had to cope with higher fuel costs in 2018, but recently prices have come down. Looking at the start of 2019, in January, jet fuel prices averaged about $1.76 a gallon, 9.7% below the year-earlier level of $1.95. February showed a further 6.6% drop.

These Airline Stocks Can Add Some Lift to Your Portfolio

Investment experts pick their top bets in the airline sector.

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