Time to Buy Airline Stocks?

Few sectors have been as decimated as airline stocks.  In an era where Google (NASDAQ: GOOG) has a market cap of roughly $178 billion, many are surprised to learn that many airline stocks have market caps of under $5 billion. 

Indeed, many well known names have market caps of less than $2 billion.  The market cap of American Airlines' parent company AMR is $1.78 billion.  The cap for Delta Airlines (NYSE:DAL) is $1.85 billion.  The cap for UAL Corporation (NASDAQ:UAUA) is $1.09 billion.

To put this in perspective, the market cap of Sirius Satellite Radio (NASDAQ: SIRI) of $3.85 billion is more than 3 times the $1.09 billion market cap of Jet Blue (NASDAQ:JBLU).  The valuations are surprising given the shortage of commercial airplanes and the backlog of aircraft orders at Boeing  (BA). 

Is it time to buy airline stocks?  I think so.  The sector has been beaten down by rising oil prices and now represents compelling value.  According to Business Week, Lehman analyst Garrett Chase is now bullish on the sector. Moreover in a recent interview with Bloomberg, famed investor Jim Rogers admitted that he is buying airline stocks given their attractive valuations. 

As far back as April, George Putnam noted in his Turnaround Letter newsletter ""The airline stocks look awfully cheap to us right now." They have gotten cheaper with reduced market caps across the board.

The sector will experience further consolidation.  But at these levels, the upside looks lucrative.  Now might be the time to get back in.

Disclosure: Author is long GOOG, SIRI

Comments

[crfceo]

Don't follow the lemmings off the cliff. Fuel prices guarantee that airlines operate at a loss. The only plays in this sector are M & A's. If you are looking for long term growth opportunity, airlines are not it.

[fam62c]

The problem with airline stocks is that they may go to zero. When things get this bad, airlines file for bankruptcy. You have to look at it as a wager rather than an investment because it is gambling in the true sense of the word. I think that JBLU has a lot of upside if they survive and the fact that Luthansa owns part of them may give them a chance at survival but it's dicey. Invest at your own risk but be prepared to see some bankruptcies.

[europeaninvest]

Think one should look at PCP which has had steady profits, revenues, and improving (fabulous) margins.l Keeps putting out great numbers, goes up, and then gets dumped with everything connected to aerospace. A steal at current stock price.

[sf94127]

I have about 10% of my porfolio in airline stocks; this is how I'm playing my bet that crude oil will come down in the next few months.
Oil company stock is not going up anymore with crude oil; I take this as a sign of a peak. There is still risk of course and if I see a slide, I'll take the loss and get out.

[BioInvestor]

I'd agree with the notion that oil prices are approaching some kind of a top, when and where that peak will be reached is anyone's guess. If and when oil prices drop, it's not necessarily going to be a rapid decent. High oil prices are a major threat to the survival of US legacy carriers. As long as prices are high, there's substantial risk of loss when it comes to investing in airlines.

I am somewhat surprised that people don't know about the anemic market capitalization of legacy carriers. Many people are probably not concerned about market cap' for any company; however, those that are, particularly those following the airline industry, must surely know that the market cap' of airlines has been and continues to be small compared to many other industries.

Before buying shares in any company, I think it makes sense to study the balance sheet carefully, then analyze and compare the financial strength of all the legacy carriers. If oil continues at its current level --in excess of $90 and certainly $100--for two to three quarters, I'd expect to see companies enter into reorganization under C11. The weaker ones will go first; determining which airlines are closest to insolvency is key to avoiding personal loss when investing in this industry.

[petpesie]

For some reason, airlines cannot consistently earn profits. Until someone figures out a model that will allow the company to consistently earn profits, the market caps of airlines will always be at a discount to other industries.

It is beyond me why anyone would invest in airlines.

[Independent E.G.]

Big investors invest in monopoly which guarantees a lot. Look at those gas companies. Look at their profit level before and after their mergers. Those small gas stations were bought by bigger ones when you had a pro-merger government (congress and administration). Now the airlines are following the same pattern, only a little bit late. But airlines usually get on headlines a lot. If you can see the potential which means reduced capacity and higher price, reduced hedged whole-sale fuel price, reduced labor cost and service cost (what do they serve nowadays?), you will think very differently. Is airline important for business and society? Be objective in your reasoning even you don't like to fly and don't like their service. Can you imagine a modern economy without airline service?
On the other side, those experts and specialists really want to protect their territories because of its unique aviation "mysterious" nature of business. Airlines business is different in many ways comparing with other conventional business models. They have special regulations, they require special training, they are different from other transportation or service business. It's enough to keep Mr. Warren Buffet away from this field. But Mr. George Soro invested heavily in Chinese airlines and Jet Blue. And so do hundreds of private equities funds. They are in it with claimed "expertise". And they usually try to protect their claimed "territories"... Meanwhile, Mr. Buffet is using his private jet and invest in railroads instead.

[fxtrader07]

that's cigarbutt-investing as Buffet and Munger would call it.
you buy inferior companies in hope of a bounce. in fact, you hope that oil comes down before all the airlines have to file for ch11. that may happen or may not - who knows?
in any case, you wait for a bounce only, but this may come never, or it may come from a 50% lower price.
these companies are bleeding cash and lose tons of money. they are not great businesses. they may be fine for traders. but they are easy to identify no-nos for investors

[Independent E.G.]

Oil price will come down. The World will act together. Read and learn what's going on at G8+3 summit. 911 didn't kill US airlines and US economy, but the drivers behind the oil price are seriously trying. "All the airlines have to file for Chapter 11"? In your dreams!

[BioInvestor]

Independent E. G. large investors, institutional investors, invest in much more than monopolies. You can read the prospectus of many of the largest mutual funds--or look at the filings of any large company--and see they invest in a range of companies.

Airlines have been in merger and acquistion mode for many years--long before the latest round of mergers in the energy sector.

I wouldn't put too much emphasis on the fact that the airline industry has different regulations and that people in the industry require unique training. The same situation prevails in other industries. It's not a differentiator.

Actually, Warren Buffett used to invest in the airline industry. In the 90s, he had a large holding in what is now US Airways.

[Independent E.G.]

Airlines are important to modern society, very important. But they have to depend on oil for fuel. Oils are relatively scarce (comparing with hydrogen) and do get expensive (comparing $10/barrel). Next comes labor cost and everything else made up pretty much the last third of the cost. It may seem to be complicate or different with its unique characteristics but it falls in transportation and service categories. That shouldn't be the reason to scare people away, or does it? It share many common ground with other business, then what is it that really make people think they should stay away from airlines? If it's not the high oil price?

[fxtrader07]

@BioInvestor: Buffet called his airlines investment one of his biggest mistakes later on. he stated very pronounced that he got out with a profit only because of pure luck and he has been very negative on airlines as a business and as an investment ever since.

[Independent E.G.]

There shouldn't be any dispute that Mr. Buffet is a "big" investor. If you are a serious investor, you wouldn't think those "mutual funds" are getting anywhere near "big" returns. Mr. Buffet really believes in monopoly. It's allover in his investing philosophy and practices. That's an indisputable fact. The airlines are shaking toward that direction. Lots of volatility. The time-frame we are talking here is right now and "meanwhile". Not the 90's. That's a very different scenario.

[BioInvestor]

Independent E.G., Warren Buffet is a big investor, no question, and he does merge many companies into Berkshire Hathaway, but he also makes purchases, many purchases, without a majority position in companies.


There shouldn't be any dispute that Mr. Buffet is a "big" investor. If you are a serious investor, you wouldn't think those "mutual funds" are getting anywhere near "big" returns. Mr. Buffet really believes in monopoly. It's allover in his investing philosophy and practices. That's an indisputable fact. The airlines are shaking toward that direction. Lots of volatility. The time-frame we are talking here is right now and "meanwhile". Not the 90's. That's a very different scenario.

[borisb]

the price of highly popular jetblue looks amazingly low at $3.50 a share.