3 Airline Stocks Set To Take-Off

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October 9, 2019
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November 2, 2019

It hasn’t been a smooth ride for airline stocks this year.

There have been a lot of headwinds facing this sector…

… The grounding of Boeing’s 737 Max 8 aircraft following two deadly crashes in a five-month span.

… Rising fuel prices in the first half of the year.

… Tariff wars with Europe that could increase the cost of new aircraft for the airlines.

But the economy continues to hum along and I am a big believer in the ongoing strength of the travel sector.

This strength is being spurred by millennials and baby boomers, which account for roughly 145 million American consumers.

This trend has been a boon to hotel operators, cruise line operators, travel websites and yes, the airlines.

The airline sector stocks are an oversold group and it’s time to buy.

Here are 3 of my favorite undervalued airline stocks to buy now:

 

Delta Airlines

Delta Airlines (NYSE: DAL) may well be the best-managed airline continually posting the highest unit revenue and other key metrics compared to United, American and Southwest Airlines.

The company reported better-than-expected quarterly earnings and record revenue. Management again raised full-year guidance.

CEO Ed Bastian noted that five of the company’s 10 best revenue days in its history occurred this past SUMMER. This is likely due in part to the fact that Delta does not operate the Boeing 737 MAX 8, which was grounded following deadly crashes.

Problems with the MAX have been hitting competitors including Southwest Airlines and American Airlines. And I believe Delta will retain some of its recent market share gains even after the MAX issues are resolved.

Shares ran up following the earnings announcement but remain undervalued. The combination of a low valuation, terrific fundamentals and large option premiums make DAL a great candidate to own and trade.

 

Southwest Airlines Co.

A favorite among consumers for its no fees and no baggage charges, Southwest Airlines (NYSE: LUV) stock is starting to show some life again.

The airline recently reported a 7% increase in third-quarter profit, a result of strong travel demand and higher fares in the wake of the Boeing Max 8 flight cancellations.

The company took a hit of over $200 million to their operating income in the recent quarter from the ongoing Max 8 grounding. However, with fewer seats available, the airline was forced to push up fares and with planes flying close to capacity it’s driven the revenue per available seat mile (unit miles) up.

The stock handily outperformed its peers in the early part of the year and the company has forecasted that unit revenue growth will increase in the fourth quarter based on current bookings. It’s time to consider giving some “luv” to Southwest stock.

 

American Airlines

While I am a fan all four of the “oligarchs” in the airline industry, American Airlines (NASDAQ: AAL) is my clear favorite of the airline stocks. AAL, along with its peers, took a hit in 2018. This was due in large part to rising jet fuel prices cutting into profits, but oil prices appear to be stabilizing.

Shares of American Airlines are up nicely since the company posted third-quarter earnings results. Given the negative impact of the Boeing 737 Max 8 aircraft groundings, I’d say these results were pretty darn good. Plus, American said passenger unit revenue grew 4% for the quarter and total unit revenue increased 3.5%.

Finally, management’s forecast for full-year EPS of $4.50-$6 was in line with the Street’s consensus estimate of $5.16. Based on the consensus estimate, the stock is trading for less than seven times earnings. That’s well below the S&P 500, which is trading around 17 times earnings.

As a side note, American also topped the list of the cheapest stocks in the portfolio of Warren Buffett’s Berkshire Hathaway. It’s time to ride AAL stock higher.

 

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