Grow Your Portfolio Through These Companies

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

The airline industry is rebounding from the severe hit it took in 2007-2008, in part from economic growth. GDP readings are okay considering we are coming out of the recession, and the consumer sentiment index is at multi-year levels. As a result, most airlines are seeing strong passenger traffic. Therefore, it is a good idea for you to gain exposure to the rising sector.

Boeing has been involved in several incidents, and thus it should be avoided for now

I like the idea of investing through airlines as opposed to investing in aircraft makers such as Boeing (NYSE: BA).

Although Boeing trades with a P/E of 19.6, slightly below the industry’s average of 22.8, its flagship aircraft the B787 “Dreamliner” has been involved in several incidents.

In January, the Japanese ministry of aviation and the FAA grounded every B787 due to an issue with the lithium-ion batteries. The grounding lasted until late April. Not only does the company spent large piles of cash fixing the problem in each of the aircraft, but several carriers are considering suing Boeing for losses in revenues.

On July 12, an empty Ethiopian Airlines Dreamliner caught fire at the London Heathrow International Airport. The evidence points towards an error from a beacon manufactured by Honeywell.

Finally, another Dreamliner had to go back to the Boston Logan International Airport. A Japan Airlines B787 had to return to the airport after a warning light came on in the cockpit.

Overall, Boeing has been involved in many incidents. Although there is absolutely no certainty about the causes of the fire in the Ethiopian Airlines or the Japan Airlines incidents, investors should stay away from Boeing. Another grounding of the Dreamliner would reduce Boeing’s revenues in the near future.

For these reasons, I would suggest that you gain exposure through airlines.

Regional airlines worth our money

Spirit Airlines (NASDAQ: SAVE) provides flights between Florida, the Caribbean and Latin America. The company trades with a P/E of 21.4, below the industry’s average of 33.7. Its revenues rose by 20% from $301 million to $370 million in the last quarter compared to a year ago. Its net income rose by 40% from $23 million to $31 million.

The company offers an interesting investment prospectus. The company is showing growth by the acquisition of new aircraft and the inauguration of new routes.

Twenty Airbus A321 were ordered to an existing order of 96 aircraft that have not yet been delivered. Spirit’s existing order is scheduled to be delivered between 2015 and 2017. Furthermore, Spirit converted 10 of its existing A320 aircraft orders to A321.

Spirit also shows signs of growth by opening new routes mainly from Dallas/Fort Worth International Airport, Houston International Airport, and Philadelphia International Airport. The routes were installed in April and June. The carrier is expanding its operations and adding destinies from other parts of the U.S. Investors should delve into Spirit’s third quarter earnings report to determine if the carrier has high load factors in the new routes.

Southwest Airlines (NYSE: LUV) is a domestic carrier that trades with a P/E of 26.9, compared to the industry’s average of 33.7. Revenue rose slightly by $80 million to $4.08 billion in the last quarter, but its net income dropped from $98 million to $59 million.

Southwest Airlines has had strong passenger traffic in the last months. In June, its revenue passenger miles, or RPM, increased to 9.8 billion, from 9.6 billion, for a 2.3% change. Also, the company expanded its available seat miles, or ASM, from 11.3 billion to 11.5 billion. The ASM is the revenue-generation ability of the carrier in simple words. Its load factor rose by 0.6%.

Also, the airline may bring more passengers in the near future due to a partnership with Dish Network. More than 400 Wi-Fi enabled aircraft provide free live TV and up to 75 on-demand shows to customers on iPad, iPhone, iPod Touch, and other internet-ready devices. This is huge news because there is nothing better than complementary services. While other carriers remove previous complementary services, Southwest is adding them! This may bring more passengers in the near term.

Lastly, the carrier announced the declaration of its 148th consecutive dividend. Although its dividend payment is $0.16 per share, or 1.16%, it is better than nothing. The company ended the last quarter with $449 million in free cash flow, so the dividend offer should not be in trouble. On the contrary, it was hiked in the last quarter from $0.04 per share. Also, the company expanded its $1 billion share repurchase program by adding another $500 million. In this fashion, the company is likely to bring capital appreciation to its investors.

The Foolish conclusion

The airline industry is recovering, and your portfolio should gain exposure. Although Boeing is a major aircraft manufacturer, the B787 “Dreamliner” has been involved in several incidents. Therefore, I would recommend investors to stay away from the company. On the other hand, carriers such as Spirit Airlines and Southwest Airlines show an appealing investment brochure. Therefore, your portfolio may gain exposure to the industry by investing in these two carriers.

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 recommends Southwest Airlines. 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