Attractive Valuations In The Airline Industry

Includes: AAL, ALGT, CPA, DAL, LUV
by: Emerging Growth

As consumer confidence increases and fuel costs remain in line, airlines have done a booming business this year so far. In fact, jet fuel prices have held steady since April and are a long way off their highs from the start of the year. Additionally, both production and demand are at their highest in a year. The offshoot is that stocks are soaring for both large and small-cap airline companies. Shares of Delta Air Lines (NYSE:DAL) are up 60 percent this year, United is up 35 percent, U.S. Airways (LCC) and Southwest (NYSE:LUV) are both up 30 percent for 2013. The outlook for the rest of 2013 is good, with healthy numbers expected for the remainder of the year.

In the small-cap arena, Allegiant Travel Company (NASDAQ:ALGT) has performed superbly this year with a return of over 40% year to date. The company actively employs a variety of risky, but extremely rewarding strategies. The company purchases used planes, charges passengers above-average fees for below-average luxuries, and avoids hedging its currency and commodity exposure. ALGT effectively maximizes its ability to meet demand in smaller and mid-sized airports, which the large-cap players have historically avoided. It has also managed to maintain strong margins, averaging an unreal 40 percent gross, which is well above the rest of the industry. It does this by thoroughly eliminating middle man discounts and frequent flyer programs. Shares are undervalued with regards to the company's growth when you take into consideration a PEG ratio of below 1 and an amazing growth of 47 percent for last quarter alone. Add in the 16 times forward earnings multiple and the stock seems like a mighty attractive buy.

The bull ride is not confined to U.S. airlines. Our neighbors to the South are having a good run as well. Latin American airlines are set to pick up by $600 million this year. Helped in equal parts by trade and business flows with Asia and North America airlines such as Copa Holdings (NYSE:CPA) are showing consistently growing revenues. CPA has shown a healthy 20% CAGR since its IPO in 2005 with an operating margin at 17 percent or higher. In 2012 the company increased revenue by 23 percent. The company has a striking P/E ratio of 18.43 and PEG of 1.30. With a total debt of $1.16 billion and a total cash of $674.81 million the balance sheet is rather strong; a nice indicator of the company's under valuation.

Investors should note that in the past five years, the airline industry has done away with 21 million domestic seats, equaling a 9 percent capacity reduction. Higher prices and fees for ancillary services will ultimately lead to higher margins. Expect shares in these companies to catch a headwind this fall in expectation of those higher margins. Companies are looking cheap relative to current earnings, which should draw in investors looking for low P/Es. On the whole, it's a nice time to add heft to your portfolio with one or more plays in the airline industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.