Airline Stocks May Be Too Cheap to Ignore

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Includes: AAL, DAL, JBLU, LUV, UAL
by: eChristian Investing

It seems like very few investors want to own airline stocks right now. Despite the fact that oil is trading below $100 per barrel and valuations look compelling, the airline sector has been diving lately.

The NYSE Arca Airline index has now posted three consecutive weeks of losses and most airlines are trading near their 52-week lows. While the airline sector has been trending lower since the beginning of 2011, most of the selloff has occurred since the end of May.

AMR Corporation (AMR)

Shares in American Airlines parent have plunged 33 percent since the end of May. The company recently reported a second quarter loss that disappointed Wall Street’s consensus expectations. AMR has bleeding red ink right now and some are beginning to speculate that bankruptcy could be in their future.

Delta Air Lines (NYSE:DAL)

Delta’s stock price has fallen 22 percent since the end of May and is now down over 37 percent for the year. Delta’s stock looks cheap – trading at only 4x consensus 2011 earnings. However, investors have been selling the stock ahead of their second quarter results this week.

US Airways (LCC)

US Airways still remains the airline that was left out of the recent industry consolidation. That hasn’t helped its stock performance as LCC shares have slide 28 percent since the end of May. US Airways shares have fallen a full 35 percent since the beginning of the year despite also trading at a low 4x multiple to 2012 earnings estimates.

Southwest Airlines (NYSE:LUV)

Even the darling of the airline industry has not been immune to the sector’s selloff. Shares of Southwest have fallen a more modest 13 percent since the end of May, but they are still at a 52-week low. Southwest stock continues to command a premium valuation – currently trading at 10x consensus 2012 earnings forecasts.

United Continental (NYSE:UAL)

Although UAL’s stock price is only down 20 percent since the start of 2011, the stock is down 21 percent since the end of May. UAL stock also looks very attractive, trading at an industry low 3.7x future P/E multiple. The airline also just reported second quarter earnings that topped Wall Street’s estimates.

JetBlue (NASDAQ:JBLU)

JetBlue operates like Southwest’s identical twin. Like Southwest, JBLU stock is down 13 percent since the end of May. JetBlue also commands a similar premium valuation of 9.5x consensus 2012 earnings. And JetBlue is also trading at a new 52-week low.

Airline stocks are often seen as an inverse play on oil prices. That’s why it is important to point out that oil prices have not increased since the end of May. In fact, the price of oil has stayed below $100 per barrel since finishing the month of May $100.89.

Aside from AMR, all of the airline stocks mentioned in this article are profitable. Not only are they turning a profit, but they are also growing their top and bottom lines respectably. Based on their consensus price targets, Wall Street sees incredible opportunity within the airline sector. Maybe airline stocks really are too cheap to ignore right now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.