* All data are as of mid-day Tuesday, December 2, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
The Regional Airlines industry, along with the major airlines for that matter, have at least two great things going for them right now: ultra-low interest rates which helps them finance their operations and purchase planes at minimal interest expense, and low fuel prices which helps reduce their largest single operating cost after wages.
While low fuel costs are a more recent tail wind, low interest rates have been providing airlines lift since the end of the financial crisis nearly 6 years ago, as graphed below.
Since the economic recovery began in March of 2009, where the broader market S&P 500 index [black] has gained 205% and the SPDR Industrials Sector ETF (NYSE: XLI) [blue] which the Regional Airlines industry belongs to has gained 270%, the nation's three largest companies in the space - Southwest Airlines Co. (NYSE: LUV) [beige], Alaska Air Group, Inc. (NYSE: ALK) [purple], and JetBlue Airways Corporation (NASDAQ: JBLU) [orange] - have all outperformed, rising 705%, 1,500% and 390% respectively.
On an annualized basis, where the S&P has averaged 36.18% and the XLI has averaged 47.65%, JetBlue has climbed an average of 68.82%, Southwest has ascended an average of 124.41%, and Alaska has soared an average of 264.71% per year!
Looking forward, the Regional Airlines industry looks set to continue flying high as tabled below, where green indicates outperformance while yellow denotes underperformance.
In the near term, the industry's earnings are expected to grow at a sensational 2.51 to 4.71 times that of the broader market's growth rate, before slowing to a more sustainable 2.51 times in 2015, and to 1.55 times annually over the next five years.
Zooming-in a little closer, the three largest U.S. airlines in the space are expected to continue soaring up, up and away, as tabled below.
Over the immediate two quarters, all three regionals are expected to grow their earnings at between 1.16 and 74.47 times the growth rate of the broader market, with Alaska at the lower end and JebBlue at the upper end of that range.
Come 2015 and beyond, the regionals' growth is still expected to hold an inclined trajectory from 1.07 to 5.91 times the S&P's average growth rate, again with Alaska and JetBlue anchoring either end of the range.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Alaska posted the greatest revenue growth year-over-year, while Southwest reported the greatest earnings growth. At the low end of the scale, Southwest and Alaska reciprocated the least growth, with Alaska posting earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Alaska operated with the widest profit and operating margins, while JetBlue contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Alaska's management team delivered the greatest returns on assets and equity, while Southwest's and JetBlue's teams split the lowest returns between them.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, JetBlue provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Southwest's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, each company's stock is cheapest relative to a different ratio. At the overpriced end of the scale, where Southwest's stock is the most overvalued relative to forward earnings and company book, JetBlue's is most overpriced relative to 5-year PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, JetBlue offers the highest percentages of earnings over current stock price for the current quarter, while Alaska offers them in all remaining time periods. At the low end of the spectrum, Southwest offers the lowest percentages overall.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, JetBlue offers the greatest growth in the immediate term and in 2015, while Southwest offers it over the next five years. At the slow end of the scale, Alaska is expected to grow the slowest overall.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Alaska's stock offers the greatest upside potential and greatest downside risk, while JetBlue's stock offers the least upside and Southwest's offers the least downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Southwest is best recommended with 7 strong buys and 5 buys representing a combined 63.16% of its 19 analysts, followed by Alaska with 4 strong buy and 3 buy recommendations representing 46.67% of its 15 analysts, and lastly by JetBlue with 4 strong buy and 3 buy ratings representing 41.18% of its 17 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Alaska soaring high above the competition, outperforming in 14 metrics and underperforming in 7 for a net score of +7, followed far below by Southwest, outperforming in 9 metrics and underperforming in 11 for a net score of -2, with JetBlue left feeling a little blue in third place, outperforming in 8 metrics and underperforming in 13 for a net score of -5.
Where the Regional Airlines industry is expected to outperform the S&P broader market substantially this and next quarters, significantly in 2015, and moderately beyond, the three largest U.S. companies in the space are all expected to continue riding the strong updraft created by ultra-low interest rates and boosted by low fuel prices, beating the broader market's earnings growth substantially near term and significantly beyond.
Yet after taking all company fundamentals into account, Alaska Air Group offers portfolios the greatest lift given its lowest stock price to forward earnings, highest cash over market cap, highest current ratio, highest trailing revenue growth, widest profit and operating margins, highest returns on assets and equity, highest EBITDA over revenue, highest future earnings over current stock price overall, highest dividend, and best high price target - decisively winning the Regional Airlines industry competition.
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