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Summary

  • 'Real Deal' is an acronym I created to help measure stocks against eight different criteria such as revenue and earnings growth, returns on assets and equity, and price returns.
  • Southwest Airlines is a company that passes the 'Real Deal' criteria, satisfying each of the eight metrics.
  • Alaska Air Group, JetBlue Airways, and Hawaiian Holdings are three companies that do not pass the 'Real Deal' criteria.

Overview

Last week, I wrote volume 2 of a series of articles related to what I like to call "Real Deal" stocks. Real Deal stocks are stocks that I believe are worth strong consideration as buys for long-term investors. "Real Deal" is an acronym that refers to the following metrics:

  • R - Revenue Growth
  • E - Equity (more specifically, Return on Equity)
  • A - Assets (more specifically, Return on Assets)
  • L - Leverage (more specifically, Financial Leverage)
  • D - Dividend Growth
  • E - Earnings Growth
  • A - Advanced Metrics
  • L - Long-Term Price Returns

When reviewing whether or not a stock is a real deal stock, the stock has to pass criteria set forth for seven out of the eight metrics listed above. For volume 3, I will be looking at the following stocks from the airline industry:

  • Alaska Air Group (NYSE:ALK)
  • JetBlue Airways (NASDAQ:JBLU)
  • Southwest Airlines (NYSE:LUV)
  • Hawaiian Holdings (NASDAQ:HA)

I didn't include other stocks such as American Airlines Group (NASDAQ:AAL) or United Continental (NYSE:UAL) due to the fact that data covering a full five years is not available because of mergers, etc. within this time period.

NOTE: One thing I didn't mention in volume 1 of this article is that while the metrics used will not change, the criteria individual companies are gauged against will vary slightly based on the industry under review.

Revenue Growth

In order to pass the revenue growth criterion of a Real Deal stock, the stock has to have averaged annual revenue growth of 10% or higher over the last five years.

Looking at the chart below, you can see that only Alaska Air Group does not pass this criterion.

(click to enlarge)

ALK Revenue (NYSE:TTM) data by YCharts

Equity (Return on Equity)

In order to pass the equity criterion of a Real Deal Stock, the stock has to have averaged return on equity over 10% over the past five years.

Looking at the chart below, you can see only Hawaiian Holdings does not pass this criterion.

(click to enlarge)

ALK Return on Equity (TTM) data by YCharts

Assets (Return on Assets)

In order to pass the assets criterion of a Real Deal stock, the stock has to have averaged return on assets over 10% over the past five years.

Looking at the chart below, you can see that, just like with return on equity, Hawaiian Holdings is the only company that does not pass this criterion.

(click to enlarge)

ALK Return on Assets (TTM) data by YCharts

Leverage (Financial Leverage)

In order to pass the leverage criteria of a Real Deal stock, the stock has to have financial leverage of 1 or less over the past year.

Looking at the chart below, you can see that Alaska Air Group and Southwest Airlines are the two stocks that pass the criterion for this metric, as Hawaiian Holdings and JetBlue both have financial leverage values greater than 1.

(click to enlarge)

ALK Financial Leverage data by YCharts

Dividend Growth

In order to pass the dividend growth criterion of a Real Deal stock, the stock has to have paid a continuous dividend that has grown over the past five years.

Looking at the chart below, you can see that Southwest Airlines is the only company that passes the criterion for this metric, seeing as how JetBlue Airways and Hawaiian Holdings don't pay dividends, while Alaska Air Group's dividend is recent.

(click to enlarge)

ALK Dividend data by YCharts

Earnings Growth

In order to pass the earnings growth criterion of a Real Deal stock, the stock has to have averaged earnings growth of 10% or higher over the past five years.

Looking at the chart below, you can see that only Hawaiian Holdings does not pass the criterion for this metric.

(click to enlarge)

ALK Normalized Basic EPS (TTM) data by YCharts

Advanced Metrics

For Advanced Metrics, I will be looking at two items: the value score and the fundamental score calculated by YCharts. Details regarding these two scores can be found here and here. In order to pass this criterion, stocks need to have a fundamental score of 7 or higher and a value score of 5 or higher.

Looking at the chart below, you can see that all four companies pass the criteria for the advanced metrics.

(click to enlarge)

ALK Value Score data by YCharts

Long-Term Price Returns

In order to pass the long-term total price returns criterion of a Real Deal stock, the stock has to have beaten the S&P total return over the course of the past five years.

Looking at the chart below, you can see that JetBlue Airways is the only company out of the four that did not pass this criterion.

(click to enlarge)

ALK data by YCharts

Conclusion

Let's take a look at how each stock measures up.

REALDEAL
Alaska Air GroupFailPassPassPassFailPassPassPass

JetBlue Airways

PassPassPassFailFailPassPassFail
Southwest AirlinesPassPassPassPassPassPassPassPass
Hawaiian HoldingsPassFailFailFailFailFailPassPass

Looking at the table above, you can see that Southwest Airlines is the only company that passed the necessary criteria to be considered "Real Deal" stocks, passing each of the eight metrics. Alaska Air Group just missed a passing grade, failing just two of the eight metrics, while Hawaiian Holdings failed five out of the eight.

Southwest Airlines not only passed each of the metrics, but it performed significantly better than the other three companies in several key areas such as earnings growth and returns on assets and equity.

Some recent developments concerning Southwest Airlines include:

  • Southwest announced that revenue passenger miles in March increased 1.6% compared to last year.
  • Airline industry in general is tracking at #7 out of 197 industry groups tracked by IBD.
  • Southwest has a 99 Composite Rating (a rating that combines all five IBD ratings into a single number, with 99 indicating the stock is in the top 1 percentile.)
  • Goldman recently upgraded the airlines sector to attractive from neutral

While I believe that Southwest Airlines is a great long-term investment, it doesn't mean that the other three companies included in this article should be avoided.

Two things to keep in mind when looking at this article (or future volumes):

1. The "real deal" criteria is not a one-stop shop for stock buying. It should only be the first step in taking a comprehensive look at investment opportunities. As always, I suggest individual investors perform their own research before making any investment decisions.

2. The criteria I have set up for "real deal" stocks heavily favors dividend paying stocks, since non-dividend paying stocks will have to pass all other criteria in order to be considered a passing stock.

Source: 'Real Deal' Stocks: Volume 3 (Southwest Airlines)