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By Chris Seabury

The airline sector has been starting to look attractive recently. This is from the lower cost structure and greater flexibility in adjusting to changes in the economy (which is raising hopes of a turnaround). A good example of this can be seen in the last year with the forward price earnings ratio on the Dow Transportation Index declining to 21.63. This is down from an average of 30.61 in 2011. The sharp drop has many investors wondering if there are compelling buys in these areas. To determine what companies are strongest in the sector requires examining the fundamentals and momentum of different carriers. This will be accomplished by looking at Delta Airlines (NYSE:DAL), Jet Blue Airways (NASDAQ:JBLU), United Airlines (NYSE:UAL), Southwest Airlines (NYSE:LUV) and US Airways (LCC).

Delta Airlines

Delta Airlines trades at a forward price earnings ratio of 3.85. The balance sheet of the company includes $34.5 billion in revenues, $3.26 billion in cash and $14.61 billion in debt. The firm has profit margins of 1.30%, operating margins of 5.23% and a return on equity of 46.26%. In the past year earnings have been volatile ranging from $.91 to -$.38 (see below).

Earnings per Share for Delta Airlines

December 2010

March 2011

June 2011

September 2011

Estimate

$.24

-$.50

$.44

$.93

Actual

$.19

-$.38

$.43

$.91

This has caused the price of the stock to rise from $6.41 (the 52 week low in August) on higher trading volumes. This is when the stock crossed over the 200 day moving average ($8.63) and is testing long term resistance of $9.00 per share. These numbers are showing how Delta is a good long term buy. This is based on the dramatic turnaround in the earnings per share from the March to September quarters. The low forward price earnings ratio, high revenues and strong return on equity are a sign that the company is experiencing healthy growth. However, there are large amounts of debt along with low levels of profits and sales. At the same time, the stock is having trouble moving through $9.00 per share. This is an indication that there will be some kind of short term pull back. If the company announces increasing earnings is when there could be a positive change in momentum.

Jet Blue Airways

Jet Blue Airways trades at a forward price earnings ratio of 3.12. The balance sheet of the company includes $4.03 billion in revenues, $1.2 billion in cash and $3.6 billion in debt. The firm has profit margins of 1.65%, operating margins of 7.19% and a return on equity of 4.26%. In the past year earnings have been volatile ranging from $.01 to $.12.

Earnings per Share Jet Blue Airways

December 2010

March 2011

June 2011

September 2011

Estimate

$.05

$.01

$.09

$.13

Actual

$.03

$.01

$.08

$.12

The rising earnings since March 2003 have caused the price of the stock to move through the 200 day moving average of $5.01. This is occurring on heavy volume (which indicates strong conviction from buyers). These facts are showing how Jet Blue is oversold. This is based on the low valuation (i.e. the forward price earnings ratio), strong revenues in comparison with debt, improving earnings since March 2011 and the stock is trading above the 200 day moving average on heavy volume. However, the company must be able to deliver a strong quarterly earnings report for December 2011. If this happens Jet Blue has the ability to move through the 52 week high of $6.87, despite its difficulties with customer service.

United Continental Airlines

United Continental Airlines trades at a forward price earnings ratio of 3.55. The balance sheet includes: $36.44 billion in revenues, $8.3 billion in cash and $13.16 billion in debt. The airline has profit margins of 1.79%, operating margins of 6.71% and a return on equity of 1,232%. During the last year earnings have been volatile going from -$.41 to $2.00 (see below).

Earnings per Share for United Continental Airlines

December 2010

March 2011

June 2011

September 2011

Estimate

$.23

-$.48

$1.43

$2.08

Actual

$.44

-$.41

$1.49

$2.00

Despite the improvements in earnings since March the price of stock reached the 52 week low of $15.92 in late November. This is beneath the 200 day moving average (which is bearish). In the short term shares are oversold. However, the longer periods of time are when the stock has the potential to see significant increases. While the fundamentals are in good shape with a low valuation and high levels of revenue in comparison with debt. The profit and sales are low which is causing the earnings to be more unpredictable. As a result, investors should wait for more clarity about future earnings and the ability of the firm to increase profit margins. This is when United Continental will be a good long term buy.

Southwest Airlines

Southwest Airlines trades at a forward price earnings ratio of 10.91. The balance sheet includes revenues of $14.66 billion, $3.66 billion in cash and $4.21 billion in debt. The firm's profit margins are 1.07%, operating margins is 5.85% and return on equity of 2.53%. In the last 52 weeks earnings have fallen from $.15 to $.03.After this, these numbers increased to $.15 in the final two quarters of the year. The technical factors are indicating that Southwest is in a bearish pattern with shares trading below the 200 day moving average. At the same time, the stock is up against long term resistance between $9.00 and $9.50. This means that there is the possibility of increased amounts of downward pressure. Once the earnings begin to rise again is the when the stock will be an attractive valuation. This will cause the revenues, cash and sales to grow. As a result, investors should wait for more earnings clarity before purchasing Southwest Airlines.

US Airways

US Airways trades at a forward price earnings ratio of 3.78. The balance sheet includes: revenues of $12.81 billion, $2.04 billion in cash and $4.47 billion in debt. The firm has profit margins .63%, operating margins of 3.53% and the return on equity is 68.67%. In the last year the earnings per share has ranged from -$.68 to $.56 (see below).

Earnings per Share for US Airways

December 2010

March 2011

June 2011

September 2011

Estimate

$..06

-$.72

$.53

$48

Actual

$.17

-$.68

$.56

$.52

These numbers have caused the stock to trade below the 200 day moving average (which is bearish). As a result, US Airways may look attractive from the low forward price earnings ratio, debt, high revenues and cash. However, the firm has very little profit growth. This has caused the earnings per share to become unstable. Until there is more clarity with these figures, the stock will face continuing amounts of pressure. Please note: the analysis of the above companies should be used as a starting point for any kind of further research.

Source: 2 Strong Airline Stocks To Buy, 3 To Avoid