S&P Upgrades US Airways To Strong Buy With Price Target Of $26

| About: American Airlines (AAL)

Last week, the credit rating agency Standard & Poor's upgraded US Airways (LCC) from "buy" to "strong buy" citing that the company is deeply undervalued. The company also raised its price target to $26, which presents an upside of 62% for the company. After reading S&P's report, I completely agree with most of the statements in the report as well as S&P's valuation of the company. The latest upgrade moves the consensus target on US Airways to $22.5 per share with a median target price of $21 per share. Keep in mind that the company's current share price is as low as $16, which means the analysts see a lot of upside in the company's share price.

S&P's analysts also upgraded their earnings targets for the company. The analysts now expect US Airways to earn $3.39 per share this year followed by $3.77 next year. This indicates double-digit over last year's earnings of $3.10 per share. The company's trailing P/E ratio is 5 and its forward P/E ratio is 4 according to S&P's analysis. For a company that grows its earnings in double-digits, US Airways is extremely cheap. The company's current P/E ratio not only discounts any growth, but it also assumes that the company's earnings will shrink by about 60%, which is not happening anytime soon.

S&P expects US Airways to grow its revenues by 3% this year with capacity increasing by 2% as the company buys larger planes to replace some of its older planes (the newer planes will decrease the maintenance costs and they will be more fuel-efficient compared to the planes that are being replaced, which is an added benefit). S&P expects the demand for airline tickets to be strong enough to allow the company to raise its ticket prices slightly. The analysts also expect many airliners to engage in capacity-cutting, which should decrease the supply of available flight seats. In the last few years, airline companies have been reducing their redundancies and decreasing capacity for flight routes with weak demand in order to constrain the supply and have a better pricing power through supply and demand dynamics.

S&P's analysts expect fuel costs for the company to fall in single digit after a rise of 40% since 2011. Currently, worries of war in Syria is keeping oil prices up; however, the chances of a full-scale war in Syria are very slim and the oil prices should head down once the fears regarding the war are worn off.

S&P's analysts were cautiously hopeful about the merger between US Airways and American Airlines (AAMRQ.PK); however, all their analyses were based on a scenario where there is no merger and US Airways continues to operate as a standalone company. If the merger happens, the scenario gets even more bullish.

Recently, JetBlue (NASDAQ:JBLU) announced that it is not interested in partnering or merging with US Airways. This came after speculations saying that US Airways could use its cash to buy a smaller airline if its merger with American Airlines fails. I will admit that I was one of those people who were speculating about the possibility of US Airways buying a smaller airline company. Regardless of whether a merger occurs or not, US Airways will continue to offer value for investors.

Currently, US Airways trades for a price-to-sales ratio of 0.20, price-to-EBITDA ratio of 2.36 and a price-to-cash ratio below 1. No matter which metric one looks at, US Airways looks like one of the cheapest stocks in the market.

At this point, it is very difficult to say whether the merger between US Airways and American Airlines will get approved. Many analysts are cautiously optimistic, but most analysts agree that US Airways is deeply undervalued regardless of the merger situation. The company is currently a cash cow and it has plenty of money in the bank, which gives it several options for returning value to shareholders, such as dividends, buybacks, partial or full acquisitions. I would personally prefer a large buyback where the company buys 10-20% of its outstanding shares. This would send a pretty loud "our shares are so cheap" message to the investors and stimulate more buying from them.

The last two years have been very generous to the investors of US Airways. Just 2 years ago, US Airways was trading for $4 per share, which is less than a quarter of today's share price. I started following the company when it was trading for about $10 and I have been long in this company on and off in the last year or so. Even though the company's share price appreciated greatly in the last 2 years, there is still plenty of upside left. US Airways is having the most profitable days of its history and the company is doing better each day. Regardless of the merger, US Airways continues to be one of the most attractive stocks in the market today.

Disclosure: I am long LCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.