In a mainly overvalued market, there are still many companies that are undervalued by a large margin. These companies are waiting to be discovered by the investors who are looking for good value plays. In the short term, technicals may prevalent but sooner or later the fundamentals take over to determine market value of a company. One of these companies, which should see a huge upside once the fundamentals take the matter to their hands, is the US Airways (LCC). I believe that US Airways is one of the most undervalued stocks in the market, and this idea of mine only got reinforced when the company announced its quarterly results a few days ago.
The company's market value currently sits at $1.94 billion. This is less than the company's cash holdings of $2.43 billion. Also, the company's market value is tiny when compared to its revenue of $3.20 billion in the last quarter. The company's current P/E is 3.88 for the twelve trailing months. The only concerning point in the company's balance sheet is its total debt which stands at $4.56 billion. However, I am not too worried about this debt as the company has more than enough resources to cover this debt. Most of the company's debt is long term, and the company's future earnings look just as brilliant as their current earnings.
In each of the last 4 quarters, the company successfully beat the earnings estimates. In the last quarter, the company achieved 98 cents per share and beat the average estimate of 92 cents per share by a margin of 6.52%. The analysts expect the company to see great years ahead and the company has a habit of beating the analyst estimates, which is very nice. By the end of this year, the company is expected to earn between $2.05 and $2.97, by the end of next year, it is expected to earn between $1.90 and 3.80 and in 2014, it is expected to earn between $3.25 and $4.15. Even the most pessimistic analysts expect the company to see double digit growth in the next few years. On a side note, these numbers don't even take into account a possible merger with American Airlines (AAMRQ.PK). If the merger happens, the company will increase its revenue by more than 100% immediately.
The merger between the two companies may happen pretty soon. The deadline of American Airlines to come up with a feasible business plan is just around the corner. Earlier the company got an extension on the deadline from the bankruptcy court but it is not likely to receive another extension when the creditors of American Airlines (which happens to include US Airways) are eager to get their money back soon. American Airlines has been having trouble with reaching an agreement with its pilots and this has been delaying the process significantly.
Wall Street Journal reports that the management of US Airways and American Airlines will get together next week to discuss a possible merger including the benefits and risks of such a merger. If the merger happens, the combination airline has the potential to become America's largest airline by passenger volume. Another leaked report suggests that the management of US Airways will pursue this merger regardless of whether they get approval from the management of American Airlines or not.
Of course, you might look at how the stock price of US Airways has appreciated by 136% since the beginning of the year and wonder why I believe that the company's successes are ignored by the investors. The fact is, when we consider that the company's earnings have increased by more than 400% in the last year, the capital appreciation of 136% looks rather tiny. Since the last quarter, the company's market value actually decreased by 17% despite its continued successes. In order for the stock price of US Airways to catch up with the fundamentals of the company, we would have to see a significant amount of price appreciation. In fact, the analysts expect the company's share price to appreciate significantly in the next 12 months. The target prices range from $13 to $21. In other words, the analysts expect the company's share price to appreciate between 9% and 75% in the next year. The average estimate of $15 implies a price appreciation of 25.31%. Again, these numbers exclude any benefits that could be obtained from a merger with American Airlines.
I believe that US Airways is deeply undervalued. Currently, the company could spend its cash holdings in two ways: 1) acquiring American Airlines, 2) paying off debt. In either case, the company's value will become even greater. I don't see why the company's price shouldn't double in the next couple years. I believe that US Airways is a great investment. I know that airline companies are not known to be great investments in the long term, but I will make an exception for the US airlines.
Disclosure: I am long LCC.