How Could This Stock Harm Your Portfolio?

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

Note: The July crash was a Boeing 777, not a 787. This version has been corrected and Motley Fool apologizes for the error.

The airline industry has been recovering since a severe blow in 2007. Overall, most airlines have experienced increasing passenger traffic due to higher consumer sentiment index readings. As a result, aircraft makers such as Boeing (NYSE: BA) and Airbus have strong orders for new planes.

The B787 and the A350... two marvels of engineering.

Boeing has designed a new wide-body aircraft named the B787 "Dreamliner," which aims for superior fuel efficiency, so that airlines' operating margins grow. Airbus is competing against Boeing by developing the A350 model.

Unfortunately the Dreamliner has not had a smooth ride. Since the project was in the design and testing stages, there were several delays. In the beginning of 2013, all of the Dreamliners were grounded due to proof that there was a malfunction on its lithium-ion batteries which caused fires. After the company corrected the issue and the Federal Aviation Administration approved the revised design, the agency lifted the grounding on April 26, 2013. The 787 returned to service on April 27, 2013.

On July 2013, a tragedy involving a 777 occurred in San Francisco where an airplane crashed. However, evidence pointed at human error.

The latest incident involving a B787 occurred when an airplane caught fire at the London Heathrow International Airport. Although U.K. officials did not find evidence that the batteries were the cause for the fire, Boeing's stock plunged some 5%.

Certain analysts may suggest investors pick up some shares after the sharp drop in price. However, I would advise steering away from the company for the time being until there is no ambiguity with respect to the fire's causes. If the incident suggests there was a mistake in the design, the Dreamliners may be grounded again, and the company’s revenues may decline. In addition, several airlines are likely to seek for compensation in the event the grounding occurs.

From a fundamental analysis point of view, the company trades with a price-to-earnings ratio of 19.0, compared to the industry’s average of 22.5. According to its most recent earnings report, revenues declined by 3% to $18.8 billion, and its net income increased by 20% to $1.1 billion.

U.S. Carriers show love for Airbus!

On other matters, several U.S. carriers are retiring their Boeing aircraft, but they will be replaced by Airbus aircraft. U.S. Airways (NYSE: LCC) and Spirit Airlines (NASDAQ: SAVE) will not operate any Boeing aircraft in the near future.

U.S. Airways will retire its Boeing fleet in the interim. Its fleet of B737-400s will be replaced by A321s. Also, the B757 fleet is scheduled to retire between 2016 and 2020. Lastly, the B767 will be retired in 2017, and they will be replaced by Airbus A330-200. The carrier has ordered 18 Airbus A350-800 and 4 A350-900 to use in long-haul flights.

Operational margins for the company should increase since newer, more fuel-efficient aircraft will be used in long-haul flights. Furthermore, with the merger with American Airlines the company’s exposure to international markets should significantly increase. Investors may expect higher revenues in coming quarters.

U.S. Airways may offer a better investment prospectus compared to Boeing. The company trades with a P/E of 5.7, well below the industry’s average of 32.1. Revenues in the last quarter increased by 10% to 3.4 billion with respect to last year’s. Net income rose by 50% to 69 million.

Spirit Airlines is another airline that uses only Airbus aircraft. The fleet is composed of 29 A319-100's and 19 A320-200's. However, the company is experiencing strong passenger traffic, and it has ordered 53 A320-200's, 45 A320-NEO's, and 30 A321-200's.

The regional carrier offers an attractive investment prospectus because the growth is imminent. Not only is the carrier ordering more aircraft, but it is recruiting more employees as well. It is clear that the board of directors is confident in the carrier’s revenue-generation ability, and investors should be too.

Lastly, the company has inaugurated nine new routes from Dallas/Fort Worth, Philadelphia, and Houston. These routes may take some market share from American Airlines and United Continental Holdings because Spirit Airlines usually offers cheaper alternatives to passengers. Investors should look for revenue jumps in the third quarter’s earnings report to determine the success of the new routes.

The company trades with a P/E of 21.0, also below the industry’s average of 32.9. According to its most recent earnings report, revenues rose by 20% to $370 million, and its net income rose by 50% to $31 million.

What a fool believes

Boeing is under the spot again due to the incident at the London Heathrow Int. Airport involving a B787 Dreamliner. The aircraft caught fire, and the officials are still looking for clues as to what may have triggered the fire. Investors should remain cautious and avoid initiating positions in this stock for the time being until a resolution is given. It may be that the Dreamliners are grounded again, which may cause considerable losses to the company. My best recommendation would be to wait for the waters to calm before taking any action.

However, if investors want to gain exposure to the airline industry, they can invest in airlines. U.S. Airways and Spirit Airlines may bring capital appreciation to their investors in the near future. The companies show signs of growth by the acquisition of new aircraft, inauguration of new routes, and creation of new jobs. For these reasons, investors may opt for going long in these stocks in growth-oriented portfolios.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Robinson Roacho 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure