3 Speculative Picks From The Airline Industry

Includes: AAL, DAL, UAL
by: Dividendinvestr

by Renee O'Farrell

The opportunity in the airline industry is a hard thing to pass up. The airline industry is fairly small, at least in terms of players. It is really closer to an oligarchy-- there are a handful of major players and barriers to entry are high. It is almost like investing in the personal computing industry. Sure, there are some companies, like Acer, that have some measure of flooding in the industry. But, for the most part, when someone goes to buy a computer, he or she is going to be looking at an Apple (NASDAQ:AAPL), a DELL (DELL) or HP (NYSE:HPQ). The same is true with airlines. When you go to book a flight, odds are you're going to be looking at either Delta (NYSE:DAL), United Continental (NYSE:UAL) or US Airways (LCC).

Moreover, people love to travel, and for many, the economy means that they couldn't afford to. As things rebound financially, more will be booking that flight that got put off -- and airline share prices reflect this. Looking solely at the three major airlines in the United States, each company on this list represents a good investment opportunity. They have returned over 24% year to date and are priced at less than 5 times their forward earnings. They also have strong expected earnings growth.

Delta is the largest of the companies on this list, with a market cap of $9.20 billion. The stock is currently trading at less than $11 a share, meaning that it is priced at only 4.25 times forward earnings. To date, the stock has returned almost 35%. If analysts are correct and the company is able to increase its earnings by an average of 17.25% a year over the next 5 years, there is still room for this stock to run. I highly recommend the stock as a buy.

Ken Heebner's Capital Growth Management is a fan of the company. The fund had 3.47% of its portfolio, or $146.51 million, invested in the stock at the end of 2011 (check out Capital Growth Management's top picks). Paul Reeder and Ed Shapiro's PAR Capital Management is also bullish about the stock. The fund upped its stake in the company significantly during the fourth quarter, bringing its total holding to $113.26 million or 4.32% of its portfolio as of the end of December.

United Continental is the 2nd largest of the group, with a market cap of $7.79 billion. The company recently traded at $23.47 a share, which is 4.25 times its forward earnings. To date, the stock is up over 24%. Analysts are somewhat more bearish about United Continental's outlook, they estimate an average earnings-per-share increase of just 3.54% a year for the next 5 years. The outlook may be low but the company could be a solid long term opportunity for a modest investor. Paul Reeder and Ed Shapiro's Par Capital Management is also bullish about this company. The fund had $213.28 million, or over 8% of its portfolio, invested in United Continental at the end of 2011. Ken Heebner's Capital Growth Management is a fan of this company as well.

US Airways has a market cap of $1.75 billion and recently traded at just $10.79 a share. At this price, the stock is priced the lowest relative to future earnings of the group, with the forward price-to-earnings ratio of just 4.06. To date, US Airways' share price has increased by 112.82% and there is every indication to think that its share price will continue to swell. Analysts are expecting the company's earnings to increase by an average of 38.50% a year over the next 5 years. Ken Heebner's Capital Growth Management owns a small position in US Airways as well, valued at just $25.35 million at the end of the fourth quarter. Jeffrey Vinik's Vinik Asset Management and David Tepper's Appaloosa Management are also fans of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.