Small Airlines but Large Gains

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have already covered large-cap airline stocks in one of my earlier posts. However, the small-cap stocks still need to be discussed briefly. I clearly mentioned in my previous post that both Barclays and Goldman Sachs are bullish on the airline sector for 2013. They give three reasons for this:

1)      Industry revenue expectations remain low and leave room for disappointments, such as higher oil.

2)      The industry capacity remains in check and clearly open to revision as needed.

3)      Valuations remain modest.

However, the question to be asked is: Is this true for the small-cap airline stocks? And how will these airline stocks perform in 2013?

JetBlue (NASDAQ: JBLU): JetBlue generated disappointing traffic growth in the quarter, as Hurricane Sandy negatively impacted demand. However, consensus estimates appear achievable, as 4Q EPS expectations have declined 75% since Oct. 1 on disappointing monthly traffic results. The company is expected to announce an EPS of 2 cents and a quarterly revenue of $1.22 billion in its 4Q earnings release on Jan. 29.

Ex-fuel CASM performance at JBLU has generally been disappointing. As the network strategy appears to be generating strong RASM results, the improving cost performance is expected to be one of the biggest levers that should aid the carrier in closing its relative ROIC gap. However, we expect 2013 to be another year of CASM growth as we expect ex-fuel CASM to increase by 2-4%.

While the management is expected to provide commentary on the leisure traffic trends, I do not expect any major announcements ahead of the company’s investor day in March.

Spirit Airlines (NASDAQ: SAVE): Following a tough 2012 where the company saw margins decline in 2H, in part from cost pressures and the impact of superstorm Sandy, SAVE might start witnessing unit cost declines in 2013 that return margins back towards 2011 levels.

SAVE does not provide revenue or RASM guidance; however, the carrier may provide some qualitative commentary about the demand environment. We think any comments on that front will likely be actionable given how SAVE was negatively impacted following Hurricane Sandy. The company is expected to announce an EPS of 23 cents and a quarterly revenue of $331.2 million in its fourth quarter earnings release on Feb. 11.

Allegiant Travel Co. (NASDAQ: ALGT): 2013 is expected to be another strong year after an impressive 2012. The earnings will be aided by added seats on the MD-80s and the development of new Hawaii flying. The valuation has ticked higher, but given the 18% ROIC and growth, Barclays believes that even the 6.5x target EV/EBITDAR (Earnings before interest, tax, depreciation/amortization and rent) multiple is conservative relative to historical valuation for well-performing small-cap carriers.

The company is expected to provide guidance for 1Q13’s PRASM. It will most likely be a decline of 8% on a YoY basis. While 2013 capacity and cost guidance was provided during ALGT's investor day in November, any discussion of growth and/or cost performance will be interesting for investors, especially in light of the carrier's fleet expansion initiatives. Also, the company is expected to provide an update on its A319/A320 fleet initiatives following the termination of its A319 agreement with Cebu and its recent agreement with Iberia for A320s. The company is expected to announce its earnings on Jan. 30.

Foolish Bottom Line

Given some modest valuations in the small-cap airline stocks with the Sandy storm having already been priced in, I believe small-cap airline investors will enjoy this earnings season. Also, it should not be forgotten that low-cost airlines are mostly successful in recessionary times. 


AnalystX has no position in any stocks mentioned. The Motley Fool owns shares of SPIRIT AIRLINES INC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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