The air travel industry is famously cyclical, making airline stocks poor long-term holdings. But when things are going well for the industry, it can be a source of short- and medium-term gains. You just need to know where to look.
Today, there are a few bright spots.
The first: budget airlines. These carriers are newer than the big old dogs (like bankrupt American), so they don’t have decades of retirees’ pension costs weighing them down. They also keep costs down by doing things like charging passengers for blankets and food. And they’re often more creatively and nimbly operated: easyJet, for example, doesn’t assign passengers seats because they can board planes faster that way.
I won’t call it a trend, as budget airline stocks regularly pop up in the Digests every so often, but I did notice that there was one in the most recent Investment Digest and there’s going to be a budget airline stock in tomorrow’s Investment Digest. I can’t tell you the name of the stock here, but I can share the recommendation from the last issue. Here’s the recommendation of Spirit Airlines, Inc. (SAVE), from Stephen Quickel of US Investment Report by way of the Investment Digest:
“Spirit Airlines, Inc. (SAVE), flying out of Miramar, FL, has grown rapidly by drastically under-cutting air fares. SAVE claims to fly its passengers at an average of just $63 per seat, compared with $189 per seat for American, $169 for Delta and $133 for JetBlue. Flights are cramped on its narrow-bodied Airbuses, and amenities are few on its routes from and to south Florida, the Caribbean and Latin America.
“Once called Charter One, Spirit went public in 2011 and the price zoomed from 10 to nearly 20. A consensus of 11 analysts sees the yearly net rising from $1.32 per share to $1.98 in 2012, $2.49 in 2013 and $3.13 in 2014. A $20 stock that can generate earnings of $3 is pretty inexpensive. [Buy.] Estimated Target Price 26.”
The second part of the airline industry that’s interesting today is... parts suppliers. It sounds boring, but again, there’s a company from the sector in tomorrow’s Investment Digest, and there was one in the last issue.
There are good reasons for this sector’s growth too. The aircraft industry has its own cycle that is related to but distinct from the airlines’ cycle. It got a kick in the pants recently when Boeing (finally) began building Dreamliners. More broadly, airlines are replacing older, less fuel-efficient planes with newer, lighter models, and that replacement cycle is currently in high gear. Between 2011 and 2015, approximately 6,500 new planes will be built and delivered.
That’s good news for companies that make the parts for those planes. The one in the latest Investment Digest supplies everything from business class seats to the oxygen masks that drop out of the ceiling. Here’s Mike Cintolo’s recommendation of the company, originally from the Cabot Market Letter:
“We’ve long been fans of BE Aerospace, Inc. (BEAV), as the company is the top supplier of fasteners, consumables and cabin interior products for jet liners. When deliveries of jets pick up—as they will, beginning this year—sales and earnings growth do the same.
“Management has proven adept at growing the business, especially through newer, exclusive deals that will ramp up in a year or two; fourth quarter sales and earnings were up 21% and 43%, respectively, and perhaps best of all, the company has a total multi-year backlog of $7.9 billion, up 35% from a year ago. BEAV was one of the first stocks to hit new highs this year and has been under control ever since. We think it’s a good buy around here, or on any pullback of a point or two.”
Both of these stocks still look like good buys. Or consider subscribing to the Investment Digest for more ideas from the airline industry and other attractive sectors.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
