I was at dinner with a group of colleagues in the publishing industry the other night when someone mentioned the recent incident where a passenger on a United Airlines flight was dragged from the plane, and someone else mentioned that the airline stock had plunged as a result, losing more than a billion dollars in value.
Judging from the way the media work these days, I guess more than half the country knows that United stock suffered from that incident.
But take a look at this chart.
Can you identify the day when the stock “plunged” due to that incident?
No, because as far as price movement goes, it was just another ordinary day for UAL stock. Sure, trading volume was roughly triple that of a normal day, but the stock’s movement wasn’t unusual at all. (For the record, the day in question was April 11, which came immediately after the stock closed near 72. The heavy selling drove the stock briefly down to 68.36, but the stock ended the day at 70.71.)
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Then, just last week, after United CEO Oscar Munoz testified before Congress, the stock surged from its previous close of 70.27 to close at 73.94, for a gain of 5% on the day. In dollars, that gain was worth more than $2 billion in value.
But did anybody write a headline about that?
No, because bad news sells. So if you want to know the whole story about United, you have to look further. And in this day of increasingly biased news, if you want the honest truth, the best place to look remains the stock’s chart.
So today I’m taking you on a quick run through airline stocks, starting with the largest, by revenues, and working my way down.
Airline Stock #1: American Airlines (AAL)
American is the largest airline in the world, with revenues of $40 billion. It was bankrupt in 2011; it merged with US Airways in 2013; and today it’s flying high (sorry), raking in $40.4 billion per year. Trouble is, American is not growing. Revenues shrank in the past two years and in the first quarter of this year, the company’s revenues missed analysts’ estimates, while the company’s after-tax profit margin was just 3.2%, the worst in many years.
Huge companies that aren’t growing often pay big dividends, but American’s dividend is only 1% because management doesn’t have enough confidence in future cash flows. The best thing I can say about AAL is that the stock is cheap, with a price/earnings ratio of just 5, so someday it might be a great value. But the stock has been underperforming the market for years and today the chart says the sellers are in control.
Airline Stock #2: Delta Air Lines (DAL)
Delta, which is a mite smaller than American, last week released a positive report on its April traffic, which sparked buying in its own stock as well as others (including United).
But Delta, like American, is not really growing. Still, its dividend of 1.8% is nearly twice American’s, and its chart is not quite as bad.
Airline Stock #3: United Continental Holdings (UAL)
UAL, which has revenues of $37 billion, actually hit a new high at 76 in December, and has been trying to break through that resistance level since. And now that weak shareholders have abandoned the stock in the wake of the dragging fiasco, it has a better chance of doing so. Interestingly, United doesn’t pay a dividend. If you buy this, you’re in it for the short-term up-cycle of the industry, however long it lasts (and that’s the $64,000 question).
Airline Stock #4: Southwest Airlines (LUV)
Southwest, with revenues of $20 billion, is still growing. Earnings are projected to grow 2% this year and 23% next year. Thus, it seems fair that LUV has a price/earning ratio of 16—and pays a dividend of just 0.7%.
As to the chart, it looks pretty good. The stock hit a record high of 60 in March and is now working to top that.
Airline Stock #5: Latam Airlines Group (LFL)
Based in Chile, Latam (previously known as LAN Airlines) provides passenger service to 138 destinations in 25 countries and freight services to a slightly larger area. And like all airlines, it’s had its ups and downs. Most recently, the stock fell from a high of 30 in late 2010 to a low of 4.4 in January 2016.
But since then, it’s been regaining that lost ground, and fast! Most recently, a March 15 earnings report sparked a big gap up from 10 that kicked off a rally that took the stock all the way to 13.5. With revenues of $10 billion, Latam is projected to grow earnings 246% this year and 42% in 2018.
If you want to read more about Latam, you should become a regular reader of Paul Goodwin’s Cabot Global Stocks Explorer, which recommended the stock soon after that gap up.
To get started, click here.
Airline Stock #6: JetBlue Airways (JBLU)
With revenues of $6.6 billion, JetBlue is still growing. But earnings are expected to shrink 16% this year, so the growth of 11% that’s expected in 2018 won’t even get earnings back to their 2016 levels.
And that’s why the stock has been underperforming the market since late 2015.
However, there is still an opportunity to make money in JBLU. That’s because while most airline businesses are so cyclical that it’s hard for value investors to get a handle on them, JetBlue has a history of relatively steady growth.
As a result, it’s one of two airline stocks recommended in Roy Ward’s list of Top 275 Value Stocks in Cabot Benjamin Graham Value Investor. In this list, Roy gives you his precisely calculated Maximum Buy Price and Minimum Sell Price for JBLU, as well as 274 other high-quality stocks.
To get started, click here.
Airline Stock #7: Alaska Air Group (ALK)
Alaska Air Group, which recently acquired Virgin America, has revenues of $6.3 billion and is also growing; analysts expect earnings growth of 7% this year and 9% next year. But those estimates are down from previous estimates, and the stock tells the tale.
Since hitting a high of 101 on the first day of March, ALK has fallen to 85, with the latest plunge coming after the company’s first revenues fell short of analysts’ estimates.
With a price/earnings ratio of 12 and earnings growth not even near that going forward, ALK looks overvalued—and that’s typical of growth stocks where growth is slowing.
Airline Stock #8: Hawaiian Holdings (HA)
Hawaiian flies from the islands to 11 mainland U.S. cities, as well as Japan, China, Australia, New Zealand and many smaller Pacific Ocean islands. Revenues are $2.5 billion, but growth is slow; earnings are expected to grow just 3% this year and 2% next year.
The stock, however, tells a more positive story.
HA has been in a long uptrend in recent years, hitting a high of 61 back in December, after which it gradually pulled back to 46. But after the company reported an excellent first quarter on April 20 (revenues up 11% and earnings up 30%), investors gapped the stock up to a high of 56, and it’s been consolidating that gain since, with no selling pressures to push it back down. It’s definitely worth watching.
Airline Stock #9: Spirit Airlines (SAVE)
Famous (or infamous) for its low fares that include nothing extra, Spirit gets 48% of its revenue from charging for those extras. But growth at the airline, which has $2.4 billion in revenue, has slowed in recent years, and the stock hasn’t hit a new high since December 2014.
Still, the growth trends of revenues and earnings are intact. And the company’s first-quarter earnings report brought a round of increased earnings estimates from analysts. Furthermore, the stock is on Roy Ward’s recommended list of Top 275 Value Stocks in Cabot Benjamin Graham Value Investor.
To learn more about that, and to learn exactly where Roy’s Maximum Buy Price and Minimum Sell Price are, click here.
Airline Stock #10: Azul (AZUL)
Founded in 2008 by David Neeleman, the founder of JetBlue, Azul is the third-largest carrier in Brazil. Revenues are $2 billion, but growing fast. 2017 should be the airline’s first profitable year and 2018 could see earnings grow 47%!
As to the chart, it’s young and strong!
The stock is still being discovered by investors, but the potential is high here, and I’m optimistic that some Cabot analyst will recommend it soon—perhaps on the next normal correction?
Airline Stock #11: Allegiant Travel Company (ALGT)
Rounding out the list is Allegiant, which specializes in providing low-cost flights for leisure travelers to Las Vegas, Orlando and other vacation areas—and, like Spirit, gets a substantial part of its revenues from charging for extras. With revenues of $1.4 billion, the airline is still growing, but earnings trends are uneven.
The stock peaked at 240 in mid-2015, and bottomed at 122 in August 2016. It’s been a real laggard in this year’s bull market.
What United Should Have Done
Wrapping up, I can’t resist adding a few brief thoughts on the topic of flying these days, starting with the United Airlines dragging incident.
In hindsight (which is always 20/20), United should have kept raising its offer price until someone gave up their seat. Also, I think all airlines would have much better success getting people to give up their seats if they walked down the aisle waving cash rather than promising some vouchers that might or might not be usable.
In any case, I think Congress should keep their hands off the industry; let the market solve the problem, and make sure the market is free enough that it can solve the problem.
For example, competition for transatlantic flights is now better than it has been in years. For customers searching for low-cost travel, Norwegian Air, Air Berlin, Icelandair, Condor Airlines, WOW Air and Turkish Air offer great alternatives to the major carriers. We need enough freedom of choice when flying domestically as well.
Lastly, we should never forget that the sheer ability to fly through the air—at a price which gets, on average, lower and lower every year—is something close to a miracle.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More