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Generally speaking, stocks rarely trade with current year P/E (price to earnings) ratios below 5, or forward P/Es below 5, for that matter. Investors are usually willing to pay at least 10 times earnings even for mature companies. A low P/E ratio indicates at least one of three things: (1) the stock is significantly undervalued, (2) investors expect the company to fall well short of its earnings targets, or (3) the company has a very weak balance sheet, leading to the risk of bankruptcy if the capital markets dry up or earnings deteriorate.

While the airlines face some risk to earnings from stubbornly high jet fuel prices (spot prices have been hovering between $3.20 and $3.30 per gallon in recent weeks), all have sufficient liquidity to weather virtually any plausible downturn. With the economy posting reasonably strong job growth recently, the double-dip recession fears of last summer seem to be contained. As a result, these airline stocks appear to be significantly undervalued at their current levels.

United Continental Holdings (UAL), parent of United Airlines, closed Monday at $19.62, more than 20% below its February high near $25. Analysts are currently projecting $4.81 in 2012 earnings per share. United Continental is facing integration challenges related to the merger of its United and Continental subsidiaries. Most recently, the company has had trouble converting to a single computer reservation system. However, the company is making progress fixing those issues, and has a very strong balance sheet, with $7.8 billion in cash and short-term investments to cover its current and future obligations.

Delta Air Lines (DAL) closed Monday at $9.19, nearly 20% below its February high around $11.30. Analysts are currently projecting $2.28 in 2012 earnings per share. Delta has been experiencing very strong unit revenue growth in recent months. Customer worries concerning the recent bankruptcy of American Airlines (AAMRQ.PK) and United's integration problems have probably benefited Delta. Delta looks poised to continue its strong performance this year.

US Airways (LCC) closed Monday at $6.89, nearly 30% below its February high just short of $10. Analysts are currently projecting $2.06 in 2012 earnings per share. US Airways is one of the few major US airlines that does not have a fuel hedging program in place. This creates risk because if jet fuel prices continue to rise, US Airways will most likely pay higher fuel prices than its competitors. On the other hand, the company will benefit the most if oil prices drop. US Airways is currently exploring a potential buyout bid for American Airlines, although the latter seems intent on a stand-alone bankruptcy exit for now.

Hawaiian Holdings (HA), parent of Hawaiian Airlines, closed Monday at $5.06, more than 25% below its late January high near $7. Analysts are currently projecting $1.15 in 2012 earnings per share. Unlike the other airlines discussed here, Hawaiian Airlines serves a niche market and is rapidly expanding capacity, profitably. The company is benefitting from the strong yen, which makes Hawaii vacations more affordable for Japanese customers, as well as the general post-tsunami recovery in Japan travel. In 2010, Hawaiian began service to Tokyo; in 2011, the company added flights to Osaka; and Hawaiian will begin serving Fukuoka next month. These growth prospects set the company apart from the larger airlines, which have largely saturated their potential markets.

These airlines are all likely to provide strong returns both in the short and long term. My top short-term pick in the sector is Hawaiian, while my top long-term pick is United Continental. However, Delta and US Airways both present good buy opportunities as well.

Source: 4 Airlines Trading At Less Than 5 Times 2012 Estimates