This Airline Stock May Be Ready to Take Off

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

For a long time, airlines were regarded by many as the black sheep of the stock market. Uncertainty surrounding labor disputes and fuel prices caused investors to shy away from the industry. Now, as many airlines have consolidated, leading to synergy benefits among other things, the industry is looking a lot more attractive. One airline in particular is trading at an absolutely rock-bottom valuation at the moment, despite fairly solid earnings growth over the last few years. Is it time to get into US Airways (NYSE: LCC)?

Flyover View

US Airways is one of America’s best known airlines. With a market cap of $2.88 billion however, it is also the smallest of the three main US publicly traded airlines. The company operates around 3,100 flights daily to and from destinations in the Americas, Europe and the Middle East. Investors have been fairly bullish on the stock this year, driving it up over 30% year-to-date.

Industry Prospects and Rising Earnings

According to several commentators, the prospects for the airline industry look fairly good at the moment. Fuel prices have remained relatively low recently, and combined with an increased number of passengers, this should translate into higher earnings. Additionally, airlines have been raising their prices, a development that is expected to lead to higher margins. With the industry becoming increasingly consolidated, cost-cutting and synergy benefits are streamlining operations across the board.

Before moving on to US Airways’ valuation, let’s take a look at their earnings and those of the competition. Encouragingly, the company has beaten every single quarter since Q1 2010. After turning a loss in Q1 for several years, the company has turned things around with a fairly impressive profit and beat in Q1 2013.

Compared to a loss of $0.13 per share in Q1 2012, EPS increased to $0.31 versus a $0.28 consensus. For the quarter, the company in fact delivered record revenue. According to management, the merger with American is going well, and is expected to produce over $1 billion in annual synergies by 2015. Second quarter earnings are due July 24.

US Airways isn’t the only airline that managed to swing to a profit in the first quarter. Delta Air Lines (NYSE: DAL) had a fairly huge beat for the quarter, with EPS of $0.10 versus a $0.06 consensus. The largest US airline by market cap, Delta saw annual EPS grow from $1.41 in 2011 to $1.88 in 2012, with analysts expecting a 3-5 year growth rate of around 8%. Investors are very bullish on the stock, up around 100% in the last year, despite a fairly hefty valuation.

United Continental (NYSE: UAL) on the other hand, another major competitor, delivered a fairly large loss for the first quarter. EPS came in at a loss of $0.98, but did beat the -$1.10 consensus. United doesn’t seem to be doing as well as the other airlines, with a net loss of $723 million last year. The 3-5 year expected growth rate of 0.6% isn’t too encouraging either. The company is now working hard to cut costs. It seems then as if US Airways is doing quite well with earnings, even compared to peers. However, the most compelling reason to invest is the stock’s valuation.

Valuations and Metrics

US Airways is just ridiculously cheap at the moment. The stock trades at 5.42 times trailing earnings, compared to Delta’s 18.41 and Southwest’s 26.29. It’s hard to see how this valuation is justified, as the company’s quarterly revenue growth of around 4% is ahead of Delta’s 1% and Southwest’s 2%. The operating margin of 7% is furthermore ahead of the industry average, and the firm somehow managed to achieve a stupendous 121.61% return on equity. To me, this stock looks like a solid buy at the moment.

The Bottom Line

With the airline industry back in the crosshairs among many investors, these stocks have had a great run lately. Benefiting from higher ticket prices and increased traffic, earnings as well as revenue have been on the rise. While most major airlines are trading at high multiples, one is still very, very cheap. US Airways is trading at a rock-bottom valuation, despite strong earnings performance. As such, the stock looks like a buy to me right now.

Warren Buffett has claimed that investing in airlines is a surefire way to lose your hard-earned cash. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!


Daniel James has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus