Some airline stocks trade at five times projected earnings. Why so expensive, you might be wondering. The group's reputation on capital preservation at the moment ranks somewhere between damaged and U.K. pension manager. An index of U.S. airlines is down 42% in a year, more than double the beating absorbed by the broad U.S. market.
Plus, there's wage and fuel inflation, and the industry is desperately low on both pilots and planes. But maybe near-term obstacles can help prevent long-term squander, much the way rainy weather brings the murder rate down.
"They historically disappoint because they buy aircraft at the top of the market and take delivery in a recession or at the bottom of the market," says Cowen analyst Helane Baker. "And this time they can't do that because they can't get the planes and they don't have the people."
Baker is selectively bullish on what she concedes is not a favorite group for investors. "Sometimes I feel like there are more sell-side analysts covering airlines than there are investors in airlines," she says. This past week she upgraded Delta Air Lines (ticker: DAL) to Outperform after its third-quarter report showed, believe it or not, record revenue. She predicts 75% upside there. Her other picks include United Airlines (UAL), Sun Country Airlines (SNCY), and Alaska Air Group (ALK).
We can explain part of Delta's revenue strength as inflation and price hikes. But the company also reported its second consecutive quarter of double-digit operating margins. Management said business travel is 70% to 75% recovered in terms of volume and 80% to 85% on revenue. It reckons that earnings will hit $7 a share by 2024, more than double this year's forecast, and that free cash flow will reach $4 billion. Those figures make the current stock price of $31 and change and market value of under $20 billion look low.
Baker predicts that Delta will hit $7 in earnings sooner than that -- by next year. The industry saw a sharp rise in business and international travel starting after Labor Day, she says. Travel between the U.S. and China remains weak, but airlines are adjusting. United, once the biggest U.S. carrier to China, just added new direct flights to flourishing destinations like Malaga, Spain.
There is some concern that high prices will put off domestic vacationers. A family of four, Baker points out, could have a difficult time funding flights to Orlando, a room, and a rental car for much under $4,000. "And we haven't even stepped foot into the Magic Kingdom yet, and we haven't bought food," she says. "And so people just go, 'That's it, I'm opting out and we're driving and we can take the dog and we don't have to pay for seat assignments.' "
As someone who recently took a family trip to the Kingdom for roughly the cost of orthopedic surgery, I can confirm wanting to stick with car vacations for a while -- only without dogs, because Coco is a hairy shedder and Ginger sometimes barks at her own barks. But I just booked business flights to South Florida and Europe, and I'm much less price sensitive with the company charge account than with my Triple Rewards Misercard from Federated Skinflint.
Now to see whether other airlines report similarly strong results.
J.P. Morgan's airline analysts say that their corporate cousin, Chase Bank, has seen strengthening in card swipes for travel. "While the stocks continue to signal a meaningful deceleration in demand, in our view, the data has yet to support that outcome," they wrote in a recent report. Analysts at Melius Research, a boutique, say factors shaking markets, like rate hikes and fears of a sharp economic downturn, don't factor into management conversations. "The thing you don't hear is macro pressures (or potential recession) hurting demand," they write. "In fact, it's the opposite."
American Airlines (AAL) is struggling with profitability at a time when others aren't, which doesn't invite confidence. JetBlue Airways (JBLU) is in for a fight with regulators over its attempt to buy Spirit Airlines (SAVE). And Southwest Airlines (LUV) has a strong balance sheet but an acute pilot shortage.
United, still strong in international travel, is bouncing back quickly, even without China.
Alaska Air is prosperous and recently agreed to a new contract with its pilots -- one less thing to worry about.
Tiny Sun Country is based in the tanning mecca of Minneapolis, and collects about two-thirds of its revenue from scheduled flights, and the rest from charter and cargo customers that cover their own fuel costs. The company doesn't have a strong order book of planes, but it owns rather than leases most of the several dozen that it uses. Cowen's Becker initiated favorable coverage last month with a price target that recently implied 70% upside.
Skepticism is warranted. But one thing the group might not have to worry about soon is blown-out capacity. Boeing (BA) is operating at barely half of its 2018 output, and won't get all the way back until perhaps 2025. Meanwhile, airlines are short some 8,000 pilots, which could hit 30,000 by 2025 on a rush of retirements. And if you think that's bad, you should see the shortage of flight instructors.
Vacation demand is a concern, but analysts say that high-end trips look safe for now, and that the pandemic has so blurred the line between work and play that more travelers are mixing business with leisure travel. Wall Street has taken to calling that bleisure travel. Bleisure suits can't be far behind.
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