Take flight with these airline stocks.
The latest data on airline bookings from Bank of America suggests the uptick in summer domestic bookings and pricing continued in August. With airline stocks trading at some of the lowest earnings multiples in the market, value investors such as Warren Buffett have made big bets on the long-term outlook for airline stocks. Bank of America analyst Andrew Didora says U.S. airlines are tracking to the high end of their third-quarter guidance ranges. Considering the positive pricing trends and the lapping of last year’s major hurricanes, Didora is bullish on the following seven airline stocks.
Allegiant Travel Co. (ticker: ALGT)
Allegiant is a discount domestic airline with a clear business strategy. Allegiant has differentiated itself by flying unique routes and connecting cities that other larger airlines do not, often flying these routes just three or four times per week. Didora says Allegiant’s transition to an all-Airbus fleet will improve the company’s reliability, maintenance costs and fuel efficiency. Didora is expecting third-quarter revenue per available seat mile to decline by 0.1 percent, but he still loves the stock in the long term. Bank of America has a “buy” rating and $185 price target for ALGT stock.
American Airlines Group (AAL)
American Airlines is a beneficiary of an uptick in corporate travel, with two-thirds of its revenue coming from business travelers. Didora says American’s decision to cut both capacity and unit cost is a positive for investors. He is calling for third-quarter revenue per available seat mile growth of 3.5 percent, above the high end of the company’s guidance of between 1 percent and 3 percent. Didora says revenue per available seat mile will continue to grow by 3.3 percent in the fourth quarter and 2 percent in 2019. Bank of America has a “buy” rating and $61 price target for AAL stock.
Delta Air Lines (DAL)
Didora says Delta has a solid management team with best-in-class operations, a pristine balance sheet and an impressive free cash flow. In fact, Didora estimates Delta alone will generate half of the total free cash flow in the airline industry in 2018, which it will devote to further improving its balance sheet and returning capital to shareholders. Didora says Delta’s 2018 earnings per share guidance is conservative, and the company will exceed expectations by reporting full-year EPS of $5.89. Bank of America has a “buy” rating and $72 price target for DAL stock.
Alaska Air Group (ALK)
Alaska Air Group is a regional airline focused on the northwestern U.S., with roughly 20 percent of its total traffic connecting to hubs in Seattle and Anchorage. Didora says management has done an exceptional job, and the acquisition of Virgin America should provide scale advantages. At a price of nearly $70, Didora says ALK stock is fairly priced based on 2019 EPS estimates. He is forecasting third-quarter revenue per available seat mile to decline by 0.5 percent, on the high end of its guidance range. Bank of America has a “neutral” rating and $68 price target for ALK stock.
Spirit Airlines (SAVE)
With a fleet size of just over 121 aircraft, Spirit Airlines is a far cry from Delta or American. Spirit prides itself on providing the lowest possible fares, targeting travelers that otherwise may not have flown. Didora estimates Spirit typically charges a 25 percent discount to the fares larger airlines charge for the same routes. He predicts third-quarter revenue per available seat mile growth of 3 percent, on the high end of the company’s guidance range of between 2 percent and 3 percent. Bank of America has a “buy” rating and $56 price target for SAVE stock.
United Continental Holdings (UAL)
Didora says United Continental will likely report the highest passenger revenue per available seat mile (PRASM) growth of any of the major airlines in the third quarter. He estimates third-quarter PRASM growth of 5 percent, in the middle of the company’s guidance range of between 4 percent and 6 percent. It was difficult to find anything to complain about in United’s most recent earnings report, and management even said they are hopeful United can return to margin expansion in the fourth quarter. Bank of America has a “buy” rating and $94 price target for UAL stock.
Southwest Airlines Co. (LUV)
Didora says Southwest is the highest-quality airline in the group thanks to its conservative balance sheet and its stable earnings profile. However, with LUV stock already up 383 percent in the past five years, additional upside may be limited. In the most recent quarter Southwest’s costs were a bit higher than expected. Didora is forecasting third-quarter revenue per available seat mile growth of 2 percent, above the company’s guidance range of between negative 1 percent and positive 1 percent. Bank of America has a “neutral” rating and $62 price target for LUV stock.
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7 Airline Stocks to Buy as Pricing Soars originally appeared on usnews.com
