Foolishly Cheap Airline Stocks Trade Higher

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

Shares of FedEx (FDX) have traded lower by 5.4% since Sept. 14 following its bearish guidance, which took the transportation sector by storm. For a period of one week, most transport stocks were trading lower, thanks to the FedEx guidance and weakness from other companies in the space.

But in the past week, transport stocks have led the market higher -- and it's not companies such as FedEx, but rather airline companies. As a result, with airline stocks trading higher, is it time to buy?

In 2011 airline stocks were among the hardest hit during the sell-off within the market. The loss was a result of several reasons, including the fact that airlines usually trade with the direction of the market. Also, airline giant American Airlines filing for bankruptcy didn’t help the performance of the industry. But after strong growth, airlines are now looking very attractive. So let’s take a look at three companies with performance that is driving this industry higher.

Delta Air Lines (NYSE: DAL)

Over the last five days, shares of Delta Airlines have traded higher by an impressive 11.75%. The performance is actually a bit surprising seeing as how the company announced a softer than expected 0.5% increase in September unit revenue year-over-year. However, the company offset this weakness by boosting its third-quarter margin guidance, due to hedges against rising fuel costs.

Looking forward, the company’s future looks bright: It recently became the first airline to acquire its own jet fuel refinery, a trend that might continue in the industry.

Delta Airlines is a very attractive investment in the space. The $8.6 billion company trades with an enterprise value of $17.84 billion and a price/sales of just 0.23. The company is expecting significant earnings growth over the next year, with a forward P/E ratio of 4.00 compared to its current ratio of 9.20. This bottom line growth is a result of margin improvements, which is due to changes at the company such as acquiring its own refinery.

As an investment, the stock is still very cheap and is sure to continue outperforming the market if the market continues to trade higher. However, keep in mind that this is a company with over $35 billion in revenue, and will most likely not see large top-line growth. But with a profit margin of 3.95% over the last 12 months there is still much room for improvement.

US Airways Group (NYSE: LCC)

If you’re looking for an undervalued, fast-growing airline company then US Airways is your choice. In my opinion, US Airways is the best-in-class and after recent data it has performed the best in the entire industry, with a near 14% gain in the last five days including a 8.5% gain on Wednesday. Its large gains have been a result of industry-leading September traffic gains, with an overall 2% gain year-over-year.

The company has seen a large increase in demand, and has recently worked to add more seats to its planes, with a 1.1% improvement in the month of September. However, the most significant data was the company’s load factor (a measure of seats filled), which improved to 84%. Investors are now optimistic that US Airways may be the best performer in the space after a sharp rise in profits.

In terms of metrics and fundamental growth, the company is one of the more attractive companies in the space. It trades with a market cap of under $2 billion but returns revenue of more than $13.5 billion, with sales growth over 7%. The company’s margins are less than Delta, at just 3.30%. However, last year the company experienced minor problems with trying to cut seats to save money and is now having to account for a boost in demand. Therefore, it makes sense that margins would be slightly lower, and also that margins could rise in the next year.

The company’s P/E ratio is just 5.21, and it has a forward ratio of just 3.90. But with Foolish growth and a price/sales of just 0.13 the company could easily beat expectations if margins can rise.

United Continental (NYSE: UAL)

United Continental is the largest of the bunch and is a favorite for many investors. On Wednesday shares of rallied with a near 7% gain after baggage fees showed a major gain with $429 million in fees for the company. However, United Airlines is my least favorite in the space. It has mediocre sales growth and the worst margins compared to the others on this list. The good news is that by all measures the company is still undervalued. It trades with a forward ratio of 4.90 and a price/sales of 0.18, which is attractive to all value investors. But when compared to the catalysts and valuation of Delta and US Airways I don’t see the same level of upside.

Foolish Conclusion

Regardless of how you assess the airline space, or which company you feel is the best, I think it is safe to say that all are fundamentally attractive. Each stock has its positives and negatives, as my favorite is LCC, but it also has the highest debt-to-assets ratio which could eventually stall its growth. The industry itself has been making a comeback over the last year, yet each company remains undervalued. Each of these companies have traded with loss of near or greater than 50% over the last five years, yet each have seen significant fundamental improvements. Therefore, as we continue to see moderate economic improvements, this is a space to watch, that could post enormous gains if the market continues to rally. 


BrianNichols has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.

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