A Case for US Airways
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Two bankruptcies, a haphazard merger, and a highly volatile industry, all with exposure to wild oil price fluctuations. Am I crazy to be bullish on US Airways (NYSE: LCC)? While the stock is no walk in the park for the risk adverse investor, it does present one of the best values in the airline industry and stands to reap the benefits of yet another airline merger.
Can an Airline be Undervalued?
Of course it can, almost anything can be undervalued with a low enough price. Investors who bought airlines in early 2009 knew this and were handsomely rewarded with multi bagger returns at such airlines as United Airlines, now United Continental Holdings (NYSE: UAL), Delta Airlines (NYSE: DAL), and of course at US Airways.
Those investors noticed that with a turnaround in the economy, airline profits could rise again and the crash in oil prices due to the recession would make achieving profitability far easier. Today the airlines have regained much of their lost ground but for most their stock is still only worth about half of its pre-recession level. In the case of US Airways, it's worth even less than that.
The Income Stream
Strong earnings are one of the biggest things going for US Airways and the airline trades at less than 5 times earnings, despite being expected to maintain (and grow) this level of earnings over the next two years. Analysts are expecting the P/E ratio based on the current share price to fall to 4.5 times for 2012 and to 3.3 times for 2013. With these earnings, US Airways is a steal as an income stream, especially when compared to United Continental which trades higher even with negative earnings.
Bring on AMR
Many investors in US Airways are interested in the possibility in a merger with bankrupt American Airlines. While airline mergers do have their risks, an AMR merger is expected to be beneficial to US Airways both for consolidation, expansion, and network purposes.
One of the biggest problems in the airline industry is cutthroat competition causing low ticket prices and hence, slimmer margins. But as fewer competitors exist, competition will not be as fierce and ticket price wars will not be as damaging. A rise in ticket prices is beneficial for the entire industry and US Airways' merger with AMR would reduce the number of large competitors.
US Airways is one of the few airlines without a central U.S. hub for its network. While Delta has Salt Lake City and United has Chicago, US Airways is built around Phoenix, Charlotte, and Philadelphia. This stems from US Airways history as a merger between western U.S. America West and northeast favorite US Airways. As a result, US Airways burns more jet fuel due to longer flights cutting into company profits. However a merger with AMR would not only give US Airways the Dallas Airport and a larger Chicago Airport presence, but AMR has many prized routes in South America and overseas. Improving the layout of the US Airways network could cut fuel costs by reducing flight times while at the same time allowing the airline to serve more destinations.
Cleared for Takeoff
The airline industry is probably one of the most criticized industries in the stock market but even here, value can emerge. Through a combination of increasing earnings and consolidation in a merger, US Airways is in much better shape than Wall Street is giving it credit for. And if a stock truly is undervalued, even an airline could benefit one's portfolio.
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