Take Flight With 8 Best Bets in the Airline Sector

With a strong economy and oil prices stabilizing at lower levels, the airline sector has been a strong recent performer. From airline operators to aircraft leasing firms and to a pilot training firm, several MoneyShow.com contributors highlight some favorite stocks that are poised to take flight. Leo Fasciocco, Ticker Tape Digest With revenues of $2.6 billion, Spirit Airlines , based in Miramar, Florida, provides airline services in the U.S., Caribbean and Latin America. Its all-Airbus Fit Fleet operates some 420 daily flights to 59 destinations. It has 95 Airbus single-aisle aircraft, which are referred to as A320 family aircraft and include the A319, A320 and A321 models. Its Bare Fares offerings are unbundled base fares that remove components included in the price of an airline ticket. It also offers Frill Control, which allows customers to pay only for the options they choose, such as bags, advance seat assignments and refreshments. This year, analysts are forecasting a 12% increase in net to $3.72 a share from the $3.33 the year before. The 2018 estimate could be boosted by analysts. The stock sells with a price-earnings ratio of 14. We see that as attractive for value-growth investors. Looking out to 2019, Wall Street predicts a 23% gain in net to $4.58 a share from the anticipated $3.72 this year. The stock has surged the past 12 months and is well positioned to break out from its long-term consolidation. The big move was triggered when the company said revenues for the latest period were much stronger than expected. The big pick-up in volume is also very bullish. We are targeting the stock for a move to $68 per share within the next few months, or sooner. Tony Daltorio, Growth Stock Advisor Canada's CAE Inc. is our play on the airline pilot shortage. Its fiscal second-quarter earnings matched Wall Street expectations and revenues topped Street estimates. The company is a maker of simulation technologies and training services for airline operators and manufacturers. Earnings per share increased 15% to C$0.23 ($0.17) in the three months ended Sept. 30, from C$0.22 in the year-ago period. Fiscal second-quarter revenue increased by 20% to C$743.8 million from C$618.2 million a year earlier, well above the analyst consensus of C$661.3 million. This is one of those stocks you must be patient with because we are talking about very long-term trends, while Wall Street remains concerned about what will happen in the next day or two. CAE is doing a fantastic job of building its business for the long-term. Company CEO Marc Parent did a great job of covering the highlights in his statement on the fiscal second-quarter results. He said, CAE had a good performance in the second quarter with double-digit earnings growth, strong free cash flow and a record order backlog. We have good momentum in all our markets and we are on track to deliver on our growth outlook. I expect CAE stock to continue its slow, steady glide upward. It has returned 77.5% over the past three years and even 11.5% in a bad year for many stocks this past year. Add in the 1.5% dividend yield and you have a stock that allows you to sleep well at night. Crista Huff, Cabot Undervalued Stocks Advisor Delta Air Lines is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. Wall Street expects Delta's full-year EPS to grow from $4.93 in 2017 to $5.53 in 2018 and $6.28 in 2019, reflecting growth rates of 12.2% and 13.6% in 2018 and 2019. The 2019 P/E is 8.7. Full-year 2018 revenue is expected to rise about 8%, and margins are expected to increase in 2019. DAL has traded sideways, between $48 and $60, since reaching a new all-time high in January 2018. The recent drop in crude oil prices adds to Delta's profitability in the near term. This is an undervalued growth and income idea. The stock has reached its highest share price since the 2007 bankruptcy time period. Stocks that break out of trading ranges will often pull back one more time before commencing the new run-up in earnest. Yielding 2.6%, I rate the stock as a Strong Buy. Tim Plaehn, The Dividend Hunter My strategy for getting through the next bear market and surviving until the next bull is to own higher-yield, dividend-paying stocks that will not cut the dividend through the downturn. Aircastle Limited may be my personal favorite stock to buy in a bear market. Aircastle is an aircraft leasing company with client airlines around the world. The current $1.20 per share annual dividend is backed by about $4.00 per share in free cash flow. This stock got very cheap in the last bear market even though the financials remained rock-like. Picking up AYR shares at the bottom of the bear resulted in gains that were multiples of the share price. This is a nice 6.7% yield income stock now that gets even more attractive as the share price falls. Doug Gerlach, Investor Advisory Service Air Lease reported third-quarter revenues of $450.7 million, an increase of 19.6%. EPS grew 46.7% to $1.32, while adjusted EPS were up 15.3% on a comparable basis to $1.73. The company took delivery of seven aircraft representing $682 million in capital expenditures, ending the quarter with $15.1 billion in aircraft with a weighted average age of 3.8 years and a weighted average lease term remaining of 6.8 years. Air Lease has a globally diversified customer base of 94 airlines in 56 countries, and its cost of capital remains in a healthy range. Management claims that the airplane leasing business is somewhat independent of economic and interest rate cycles, as airlines tend to lease during periods of economic contractions, but need to expand their fleets during economic expansions. Both of which play into Air Lease's hand. Air Lease ended the quarter with its aircraft order book 96% placed through 2019 and 82% placed through 2020, all on long-term leases. Interest-rate adjusters continue to be applied on all new aircraft deliveries. The current valuation could well be one of the better bargains in the present market. Air Lease is a Buy up to $48. John Buckingham, The Prudent Speculator Alaska Air provides passenger, mail and freight air service to more than 60 cities in three countries through its Alaska Airlines and Horizon Airlines subsidiaries. Its Virgin America brand is being phased out as ALK integrates the recently acquired assets into its operations. The company earned $1.91 per share in the third quarter, versus the $1.87 consensus estimate. Shares have been range-bound this year as worries like climbing fuel prices or rising interest rates and tailwinds like lower capacity or strong passenger demand take turns pushing the stock price down and up. We think that the moderation of capacity earlier in the year was a good thing, as it allowed the airline to fly with higher load factors and we note that 2018 looks to be a trough year with EPS estimated to come in around $4.16, while projections for 2019 and 2020 are markedly better at $5.69 and $7.13, respectively. Alaska also begins taking deliveries next year of the fuel-efficient and highly capable 737 MAX and swapped MAX 8 orders for the larger MAX 9 models. We think that Alaska has done a solid job defending its market share in the Pacific Northwest by offering travelers low fares and a top-level customer experience. The stock trades for 12 times next 12-month earnings and yields around 2%. Mike Cintolo, Cabot Top Ten Trader Airline stocks have been a mixed bag, with some suffering due to flattening growth and higher costs, while others report better-than-expected results that are being rewarded by investors. United Continental is clearly one of the winners after releasing a great quarterly report -- revenue growth accelerated again to 11% (passengers flown grew 9%, while revenue per available seat mile flown was up solidly both in the U.S. and overseas), and while fuel costs soared 42%, tight controls on other costs led to a 36% surge in earnings. Many investors are thinking growth could slow as global economics cool, but UAL management was having none of it; it raised the earnings outlook for 2018 for the third time this year and said it expects margins to resume their uptrend next year. Analysts now see earnings up 25% this year and 17% next as the company balances expansion (capacity is up 5% or so this year) and profitability. While there's no dividend, the company isn't shy about buying back shares (third-quarter's share count was down 9% from a year ago!), and the top brass has an aggressive earnings target of $11 to $13 per share in 2020. The bottom line is that United Continental is looking more like a cash cow that should continue to thrive, which is attracting big investors. Ben Reynolds, Sure Dividend Southwest Airlines is the second largest U.S. airline based on market cap, carrying more than 120 million passengers annually. Southwest set third-quarter records for operating revenues, net income and earnings-per-share. Operating revenues increased by 5.1% to $5.6 billion. Importantly, Southwest's guidance implies even higher fuel costs for the fourth-quarter of fiscal 2018. Southwest's brand strength and low prices have given it a durable competitive advantage. It has remained profitable for 45 consecutive years. Southwest also has a strong financial position for an airline. In 2017, the company's credit rating was upgraded to A3 with Moody's, and BBB+ with S&P. While Southwest is arguably the most recession-resistant airline, it would still see considerable declines during a recession. Air travel typically declines during economic downturns. This is why Southwest's earnings-per-share plummeted 74% from 2006 to 2009. However, it still remained profitable during the Great Recession, and maintained its dividend. Southwest has growth potential through new routes. In May, Southwest announced plans to fly to Hawaii nonstop from California airports in Oakland, San Diego, San Jose and Sacramento. It also plans to fly among the Hawaiian Islands, which is currently a high-priced market and is serviced by only one carrier, Hawaiian Airlines. We expect 8% annual earnings growth moving forward. Using 2018 earnings-per-share estimates of $4.02 (which represents a downward revision from our prior estimate), Southwest shares trade for a price-to-earnings ratio of 13.0. This is below our fair value estimate, which is a price-to-earnings ratio of 14.0 (also lower than our prior estimate). Valuation changes could add 1.5% to annual returns if the company's valuation expands over the next five years. In addition, we expect 8% annual earnings growth, and the stock has a 1.2% current dividend yield. Therefore, we expect annual returns of around 11% for Southwest over the next five years.

Take Flight With 8 Best Bets in the Airline Sector

From airline operators to aircraft leasing firms to a pilot training firm, experts highlight their favorite stocks poised to lift off.

Columnist Conversation

Sarge Guilfoyle Breaks Down the Jobs Report, Fed Policy and Stocks!

This Weekend on Real Money

Fed Rate Decision

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.