Gene Marcial's Inside Wall StreetFrank Sinatra's Come Fly With Me might be just the tune for investors looking at the latest comeback group -- airline stocks.

Until last June, when most U.S. airlines finally posted decent quarterly results, the group was down on its luck and operated in the red, or just about broke even, for varied reasons, including soaring jet-fuel prices and skidding passenger traffic. But suddenly, all that seems to have changed. Airlines are at last up and flying -- and making money.

The primary catalyst for the turnaround was a pickup in passenger yields. True, overall air traffic remains so-so, if not woefully weak. But sales of premium, high-price tickets have started to rebound, particularly on overseas routes. And equally important, restrained capacity additions and reduced operating costs contributed handsomely to the industry's rebound.

United Continental Holdings (UAL), the result of the Continental-United Airlines merger, "reflect[s] the efforts of the large legacy carriers to rein in domestic capacity and streamline operations," says Damon Churchwell, airline industry analyst at investment research outfit Value Line.

As the U.S. economic recovery edges forward, three airline stocks stand out as buys for fundamental reasons. These three names have the most promise for accelerated potential returns:
  • US Airways Group (LCC) is now the fifth-largest U.S. carrier after its merger in 2005 with America West Holdings. It's currently trading at $9 a share, up from a 52-week low of $2.82.
  • Southwest Airlines (LUV) offers discount fares primarily on shorter-haul flights. Its stock has climbed to $12.86 a share, from a 52-week low of $8.10.
  • JetBlue Airways (JBLU) is a low-cost, low-fare carrier, offering direct point-to-point services in the U.S. Its stock has risen to $6.54 a share, from a 52-week low of $4.47.
Churchwell says these airlines are ranked high in "timeliness" in Value Line's valuation system (which ranks stocks according their "probable relative price performance"). The new United Continental Holding doesn't hold significant appeal yet, he says, and needs to be further evaluated.

Strengthening Demand for Travel

At US Airways, the third quarter shaped up decently, as profits are estimated to have hit record levels, according to Daniel McKenzie, analyst at Hudson Securities, who rates the stock a buy. He has a 12-month price target of $14 a share. The stock is inexpensive, he says, based on his earnings estimate of $2.33 a share for 2010, vs. a loss of $3.75 in 2009. For 2011, McKenzie expects earnings of $2.40.

Also a bull on US Airways is Jim Corridore, airline industry analyst at Standard & Poor's. He expects revenues to increase by 14% in 2010, partly due to strengthening demand for air travel, which could allow the carrier to boost fares. He's bullish on the stock, he says, given the improving air travel traffic along with US Airways "adequate cash position to fund operations and pay debt obligations."

Southwest Airlines, which agreed in September to acquire Air Tran (AAI) for a combination of cash and stock, posted impressive sales and earnings results in the June quarter. The purchase of Air Tran "is a good economic move," says Hudson Securities' McKenzie, who rates the stock a buy with a 12-month price target of $17 a share. The merger, he figures, will add 397 new airports to Southwest's route system. So, McKenzie upped his earnings estimate for 2011 to $1.10 a share, from $1. For 2010, his forecast is 73 cents, way up from last year's 19 cents.

Value Line analyst Warren Thorpe says over the next six to 12 months, Southwest should benefit from a continued recovery in the travel business. Value Line ranks Southwest as a "timely" buy, and notes that it has three- to- five year appeal. "Earnings prospects to 2013-2015 are bright, which makes this equity appealing for long-term investors, too," says Thorpe.

Aggressive Expansion

JetBlue bounced back to profitability in 2009, after being in the red in all of 2008. Profitability is expected to improve this year, based on the brightening demand picture and higher fares. The airline is also likely to benefit from capacity growth in areas where demand is strengthening, such as Boston and the Caribbean. S&P's Corridore forecasts that JetBlue earnings will double in 2010, to 40 cents a share from 2009's 20 cents. And for 2011, Corridore sees profits jumping to 71 cents.

JetBlue is expanding its fleet, aggressively adding aircraft, which has resulted in gains in its market share. "Currently, management is looking to receive nine airplanes in 2011, and we estimate that a 10% top-line gain will help lift share net next year," says Value Line's Churchwell. The shares are "timely," and risk-tolerant investors may be rewarded over the next three to five years, Value Line says.

Several large U.S. institutional investors have been early birds in these three airlines, which they expect to fly to higher levels. In particular, Fidelity Management & Research is bullish on US Airways, where four of its funds combined own a total stake of some 11% stake, and JetBllue, in which it holds 14%. High on Southwest is Capital Research Global Investors, in which owns some 11% of the stock.

Increase your money and finance knowledge from home

What is Short Selling?

Make a profit when stocks prices fall.

View Course »

What are Penny Stocks

The lucrative and dangerous world of penny stocks.

View Course »

Add a Comment

*0 / 3000 Character Maximum

1 Comment

Filter by:
ronsjigslures123

Last year on this blog i told the small investors like me to buy Canada silver maple leaf coins there 99.99 fine silver and they sold for around 20 to 21 bucks each, 4 coins for UNDER 5 coins for around 100 bucks , today they on the market hit selling price of around 27 bucks each and are climbling 25 to 50 cents every 3 to 5 days , they will be at 35 to 45 each some where in year 2011. Almost 50% return or profit on your investment. You can buy them now even at 30 bucks and make a 15 to 20 buck return in a years time. Pladdium same way buy higher to buy buy the coins now at $620.00 now and it will HIT one grand very soon they already whent up $150.00 each in last 6 months, they will hit 1 grand in 2011. KEY word is buy and sell when the coins hit there high and you will know it by reading and staying on top of things SELL the dam things take your few grand profit and quit. This is a one shot deal. There are many small investors that are buying and hording these items so when they sell they will make a quick 40 to 60 grand profit. Not bad for the small guys like us that don,t have the millions to throw around on stocks. Buy some gold if you can but silver and pladdium is a really good one gold is high and you can buy more silver pladium now and with out spending tons of money and still get a 40 to 50% profit return.

October 13 2010 at 3:26 PM Report abuse rate up rate down Reply