The Best And Worst Airline Stocks On the Market: Which To Buy?

 |  Includes: AAL, DAL, FDX, LUV, UPS
by: Vatalyst

Much of the business in America is based upon transportation and logistics. But in a post 9/11 world of unpredictable economic bumps and unsettled fuel prices, the air transport sector, and passenger airlines in particular, have had their own “lost decade.” Jim Cramer detests the passenger airline stocks in general, but there are some situations far better than others. In this article, I will look at air passenger and cargo stocks, searching for winners and identifying losers based upon current value and growth prospects. Here is my analysis:

Delta Airlines, Inc. (NYSE:DAL)

DAL is one of the world's largest airlines, and was trading recently at a little over $7 per share. That is near the low end of its 52-week range of from $14.38 to $6.51. Its market capitalization is about $6.4 billion, and it has a P/E of about 14. It pays no dividend, and management has stated it will not pay any for the foreseeable future.

While far from perfect, DAL is having a better 2011 than it did the preceding few years. In the third quarter, it posted revenue of about $9.7 billion, a 7.2% increase from the year-earlier quarter. Profits were up to $0.65 per share, a 51% increase from the year earlier. The revenue increase was not due to expansion, as DAL is in the midst of an intended retraction. Rather, load factor improvements and pricing increases accounted for the top line improvement.

DAL is well regarded by analysts, with a 1.9 rating. But I would not touch the stock with a ten-foot pole. Optimistic assumptions on stable-to-declining fuel prices, or a steadily improving mix of higher paying passengers, are, in my view, just assumptions. Those, combined with a crushing debt load of over $10 billion, make this issue far too leveraged and risky for my taste. I urge passing on DAL.

United Parcel Service, Inc. (NYSE:UPS)

UPS was trading recently at about $69 per share. It has a market capitalization of nearly $67 billion, and a 52-week range of from $77.00 to $60.74. It has a P/E of almost 17, and pays an annual dividend of $2.08 per share, for a yield of 3.0%.

For the third quarter of 2011, UPS’ revenue increased by 8% from the year earlier to about $13.2 billion. Its operating profit was essentially flat with the 2010 quarter, but net profits increased by 5%, to $1.04 billion, or $1.06 per share.

It was not a good quarter for UPS. Its net profit did grow, but solely due to a lower income tax burden than in the same quarter of 2010. But unlike passenger airlines, UPS has more pricing persistency and can set its own terms. It very recently raised its prices for 2012 between 4.9% and 5.9%..

UPS is in the enviable position having its cash on hand, plus current receivables, be in excess of its long-term debt. With its solid balance sheet and large European presence that will benefit from the 2012 Olympics being in London, UPS will likely have an excellent 2012. UPS currently also has a 12.4% operating margin, compared with FedEx Corp.’s (NYSE:FDX) operating margin of 6.5%. I like UPS as a buy and hold stock, and urge further investigation.

Southwest Airlines (NYSE:LUV)

For LUV, this year and 2012 will be all about (1) fuel prices, and (2) its $1 billion acquisition of Airtran in May, 2011. LUV has been trading recently at a little under $8 per share, which is near the low end of its 52-week range of from $13.77 to $7.15. Its market capitalization is about $6 billion, and its current P/E has risen to 39. It is paying an annual dividend of $0.02, for a yield of 0.20%.

Over the next two years, LUV will be consolidating its Airtran purchase, which will save up to $400 million of costs per year. So, too, the common fuel hedging operations of many airlines came back to haunt LUV in the third quarter, forcing a one-time, $227 million dollar charge in the quarter. That charge led to a net loss for LUV of $140 million. If oil and jet fuel prices are reasonably stable, LUV’s inherent schedule and service advantages over its competition (it is the only large carrier to use a point – to – point model, rather than a hub and spoke) auger well. LUV’s entire fleet is comprised of Boing 737 aircraft, helping administrative efficiency. LUV’s relatively low debt burden, with $1 billion more in cash than in long-term debt, is also appealing.

I view LUV far more favorably than DAL or the hopelessly moribund AMR Corp. (AMR). The Airtran purchase was a masterstep. It will not take $400 million a year in cost savings, reduced to current value, for LUV to recoup far more than the price it paid for Airtran. Independent of that, LUV has managed through recessions and growth, to post profits for nearly 40 years in a row. Numbers like those should grab anyone’s attention. Aggressive investors, take note.

Alaska Air Group, Inc. (NYSE:ALK)

ALK has been on a roll. It was trading recently at about $63 per share, and its 52-week range is from $70.61 to $51.10. Its market capitalization is about $2.2 billion, and its P/E ratio is about 9.5. It does not pay a dividend.

In the third quarter of 2011, ALK reported earnings of $77.5 million, or $2.12 per share. This was driven down by a one-time fuel hedging charge of $53 million, net of taxes. Excluding that charge, it would have been an all time record third quarter in terms of profits.

Many of the issues that bedevil other airlines are non issues for ALK. While AMR is litigating with its pilots union, ALK finalized a 5-year agreement with its machinists union. ALK’s total long-term debt is virtually the same as its cash on hand.

The sole downside of ALK is that it has run from its 52-week low, in early October, and is up some 25% since then. In the volatile world of airline stocks, anything is possible, and I would seek some sort of pullback before investing in this quality airline.

US Airways Group, Inc (LCC)

LCC is a troubled company. Its stock was recently trading at about $4.20 per share, very near the low point of its 52 week range of from $11.98 to $4.18. Its market capitalization at this depressed stock level is just $680 million. It has a P/E of 8.4, and does not pay a dividend.

Like many airlines, LCC faces the twin taboos of fuel prices and debts. Unlike LUV and ALK, LCC does not engage in fuel hedging practices, leaving it fully exposed to oil price shocks.

LCC’s debt load is in excess of 100% of its total capital. While I don’t usually stare much at stock price charts, it is hard to ignore LCC’s precipitous decline in the past 12 months. Unless or until the company gets its balance sheet in some semblance of order, or joins the 21st century in managing fuel cost issues, I would avoid LCC completely.

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