I'm Leaving on A Jetplane

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

Gone are the days where flying around the country, or even the world, was something only the rich could do. Nowadays, flights are a lot cheaper and more accessible. I can log on to one of a growing number of websites to search for flights on some of the world’s leading airlines.

Flying around the country hassle free has become an easy task thanks to Southwest Airlines (NYSE: LUV). Flying around the world isn’t too difficult either, thanks to American companies like Delta Air Lines (NYSE: DAL) and US Airways (NYSE: LCC). These three airlines are doing it right, they are profitable. Many of their counterparts are either just breaking even, losing money, or sitting through bankruptcy proceedings. Let’s see what these three are doing right and if we should invest in them.

Love is all Around           

Southwest Airlines has, for the longest time, been all about the love--just look at their ticker! The company focuses on flying customers from point to point across the United States and Mexico. Southwest is based out of Dallas, the city where the company got its start by flying in a triangle formation around Texas (Houston/Dallas/San Antonio-Austin). Since those early days, though, things have changed at the airline. What was once three destinations is now closing in on 100.

Over the last five years the EPS growth at Southwest has been kind of stagnant. The company has, on average, dropped its EPS by 1.73% per year. Of course, that’s to be expected as the country was going through a huge downturn at the time those numbers came out. A look at the three year EPS growth rate shows a humongous 40.58% growth! Taking in future analysts’ estimates of 75.38% growth for FY2013 and a further 15.77% for FY2014, I think I’m about to fall in love with LUV.

Those huge expected growth numbers come with a pretty hefty P/E ratio at 20.8. Price to sales is looking low, especially compared to the industry at just 0.5, and the price to tangible book isn’t too high either at only 1.44. Southwest also has relatively little debt compared to their equity, with a LT debt to equity ratio of 0.47.

Remaining Relevant At All Costs

Delta Airlines has been on a roller coaster ride over the past few years. The downturn hit the company pretty badly but they managed to hang in there and fight another day. Fast-forward to 2012 and Delta is making arguably one of its most questionable decisions of the past few years: they’re buying a refinery. That’s right, last May Delta Airlines acquired the Phillips 66 refinery in Trainer PA at the cost of $150 million. The goal of the acquisition was to hedge fuel costs, something that analysts called a smart move. Could it really be though? Only time will tell on that one, I’m more for the focus on what you do best aspect, and this branching out into refining could prove to be harmful to the company over the long term.

Delta is expected to see earnings growth over the coming years, a good thing for the company, for investors, and for the airline industry as a whole. We’re looking at 44% gains in FY2013 and a further 14% on top of that for FY2014. Both figures average out to some pretty good gains over the next couple of years.

When compared to Southwest Airlines, Delta has a much more appealing P/E ratio at just 12.3, right around the industry average but below that of the S&P 500. Delta is trading at just 0.34 times sales, which is pretty cheap by anyone’s standards.

Probably Not Where Your Money Should Be

Among the profitable airlines is a little company that you might have heard of--US Airways Group. The company owns common stock in US Airways, America West Holdings, Piedmont, PSA, and others. It’s quite a long list of companies, but that long list doesn’t always transfer nicely into a good looking bottom line.

This company is expected to see their earnings grow over the next two years, not by nearly as much as Southwest or Delta though. FY 2013 gains are looking to be around 5.93% and FY 2014 is looking at a lackluster 2.18%. Those are the types of numbers you’d expect to see from Dow components that are the stability of your portfolio, not from a $2.4 billion airline.

Bottom Line

I like both Southwest and Delta at their current levels. Both companies present different opportunities, with one being a US provider and the other trying desperately to become a world leader once again. If dividends typically tip you over the edge then I’d recommend that you look into Southwest.

I do not like, and would not advise, investing in US Airways. Their growth isn’t expected to be as good as their counterparts and I don’t see them offering anything worthwhile for me to put my money in.  


Ash1402 has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. 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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