3 Undervalued Airline Stocks

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Warren Buffett might have written off airline stocks from his portfolio, however the airline industry has been performing quite well over the last three years. It has been consistently profitable and, looking further, the future outlook also seems quite positive. In this article, I will write about some undervalued stocks that can earn you decent returns.

Airline industry scenario

Since its deregulation in 1978, the US airline industry has been very competitive. With an aggregate market cap of $37 billion, the industry operates on a thin margin of 3.4%. There are numerous factors like low switching costs, high supplier bargaining power and intense competition which makes this sector unfriendly for investors. But for a value investor, this sector is a gold mine currently. Invest in these three stocks and get ready for high returns.

1. JetBlue Airways (NASDAQ: JBLU) operates nearly 180 aircraft flying across the US, Caribbean and Latin America. It is recognized for its good service and in-flight entertainment. In the past year, the EPS growth has been a terrific 30% and analysts are expecting it to continue. Sales have also increased at an average rate of 12% over the past five years. JetBlue shares have provided a 55% return. The stock is undervalued; this is fairly visible from the PEG ratio, which calculates the P/E ratio taking into account the growth factor. The PEG ratio for JetBlue is 0.4 much less than the ideal ratio of 1, which means that the stock has enough value to even double in the next few months from the current price of $6.43.

2. Hawaiian Holdings (NASDAQ: HA) is the largest and longest serving airline for Hawaii. It operates 43 flights daily between Asia and the Unites States. Apart from this, the airline has been in the process of launching new flights between Honolulu and Taipei/Beijing. Revenues have been steadily increasing; the growth rate (14%) even surpassed JetBlue by 2 percentage points. In the past year, EPS grew by 27% and is set to grow further. Hawaiian Holdings’ PEG ratio is just 0.2. That is one sixth of 1.26, the airline industry’s average PEG ratio. However, the stock is relatively risky if compared to JetBlue. That is due to the limited growth opportunities. owing to an inadequate number of flights. Also Hawaiian Holdings operates its flights in a concentrated demographic region. So if the demand fluctuates on that route, it will be a worry for Hawaiian. However, overall the stock is a good buying opportunity. With a forward P/E of 4, this airline stock is set to grow in the coming months.

3. Delta Airlines (NYSE: DAL) was founded in 1924 and operates in several international locations apart from the US. Delta is known for its on-arrival time rate, which is an impressive 85%. Due to this, it was named the most admired airline for the year 2013. The stock has provided an over 50% return since last December. Currently trading at $18, Delta has the potential to go up further. The EPS forecast is quite high for Delta, similar to Hawaiian and JetBlue. The fact that the stock is undervalued can be seen from the low PEG ratio of 0.27 and the forward P/E ratio of 6. Delta is carrying a low debt and relatively high cash, which makes it suitable for expansion. This is in contrast to the airline industry, which is generally capital intensive and carries high debt.

The takeaway

All the above three stocks provide great value to investors. If you want to include one airline stock in your portfolio, you can pick up any one of these to diversify your holdings. And for a value investor, I suggest you include all three.

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Tanya Kanodia 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!

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