Undervalued airline stocks are worth examining as these companies remain a vital part of the global economy despite often being seen as poor investments. Historically, airline stock prices have fluctuated with economic cycles, leading to bankruptcies and failures during downturns. However, industry consolidation has led to a handful of competitors harnessing technology to manage schedules and set fares more effectively. Currently, four airlines control about 80% of the U.S. market.
Impact of Covid-19 on airline industry
The Covid-19 pandemic caused a temporary decline in airline revenue and share prices, but the rollout of vaccines revived travel, albeit with disruptions caused by new variants. In 2022, travel demand surged, resulting in congested airports and lost baggage, a trend that has persisted into 2023. Consequently, airline revenue has soared, and some of the largest carriers have returned to profitability for the first time since before the pandemic.
The pandemic also brought about changes in travel demand patterns that, if sustained, could benefit airlines for years to come. The rise of work from home models has led to year-round demand for leisure travel, helping to stabilize an industry historically characterized by cyclical demand.
Current challenges
However, challenges remain. The conflict in Ukraine and the corresponding surge in oil prices have eroded much of the additional revenue, as fuel accounts for up to 30% of an airline's total costs. Moreover, airlines are struggling to find pilots, contributing to an increase in cancellations.
Outlook
Fortunately, U.S. airlines weathered the pandemic without major bankruptcies, and the key players appear robust enough to navigate the ongoing economic turbulence. Nonetheless, the International Air Transport Association, the industry's trade organization, has predicted that a full recovery may not occur until 2024, a forecast made before Russia's invasion of Ukraine.
Despite the challenges, there are opportunities to be found, especially among undervalued airline stocks. In this analysis, we will delve into the fundamentals of three of the most affordable airline stocks, as identified through GuruFocus' All-in-One Screener.
American Airlines
American Airlines Group Inc. (AAL, Financial), despite boasting a robust financial foundation with a potential 27% upside, puzzlingly remains undervalued.
The company's latest financials disclose revenue of $52.89 billion and a market capitalization of $9.22 billion. Despite a financial strength rating of 4 out of 10 and a profitability rank of 6, the undervaluation of the company's stock is glaring. The price-earnings ratio stands at 3.78 and the forward price-earnings ratio at 4.07, both indicative of a restrained valuation. Moreover, a debt-to-Ebitda ratio of 7.65 suggests a concerted effort toward debt reduction and growth. While the Piotroski F-Score of 7 signals robust financial health, the Altman Z-Score of 0.88 raises eyebrows.
A myriad of recent challenges could be contributing to American Airlines' undervaluation. The company has been compelled to revise its current quarter earnings per share outlook downward to between 20 cents and 30 cents, a drastic departure from the earlier estimate of 85 cents to 95 cents. This revision was necessitated by a significant surge in fuel prices since the initial guidance in July. The expected average fuel prices have now been adjusted to between $2.90 and $3 per gallon, a marked increase from the previously estimated $2.55 to $2.65 per gallon. Additionally, a new labor agreement with its pilots is anticipated to diminish the operating margin by approximately 1.7 percentage points and the earnings per share by 23 cents. Consequently, American shares experienced a roughly 4% decline.
In summary, while the airline industry, and specifically American Airlines Group, have grappled with considerable challenges, the company is strategically realigning itself to unlock value through debt reduction and growth. The projected surge in business travel and traffic are auspicious indicators for the airline sector. Hence, the current undervaluation of American Airlines stock appears unjustified when weighed against its financial vigor and future potential. Despite recent hurdles, the stock is primed for an upward trajectory as the company navigates through prevailing challenges and seizes forthcoming opportunities.
United Airlines
United Airlines Holdings Inc. (UAL, Financial) is making a significant comeback in the airline industry, despite facing rising costs and economic uncertainty. With a market capitalization of $15.6 billion, the company is undervalued considering its financial strength and profitability ranks, which stand at 5 and 6 out of 10.
The price-earnings ratio of United Airlines is 5.91, while the forward price-earnings ratio is 3.68, indicating the stock is relatively cheap compared to its earnings. Additionally, the company has a price-book ratio of 2.03 and a price-sales ratio of 0.31, which further signifies its undervalued status. This is crucial for income-oriented investors looking for potential growth at a reasonable price.
Further, the debt-to-equity ratio of United Airlines is 4.65, while its equity-to-asset ratio is 0.11, revealing a high leverage level. However, the company has an interest coverage ratio of 2.94, which suggests it can comfortably meet its interest obligations. Moreover, the Piotroski F-Score of 7 out of 9 and the Altman Z-Score of 1.07 indicate the company is financially stable and not at risk of bankruptcy in the near term.
In conclusion, United Airlines is at a crossroads, facing challenges such as rising costs, economic uncertainty and legal issues. However, its strong financials, strategic partnerships and undervalued status make it a potentially compelling option for investors.
Delta Air Lines
Delta Air Lines Inc. (DAL, Financial), a major player in the airline industry, has recently partnered with Tom Brady, showcasing its commitment to expanding its brand and customer experience. Despite this positive development and displaying strong fundamentals and historic earnings, the market seems to be underestimating the company's potential.
The airline has a market capitalization of $26.2 billion and revenue of $55.75 billion. It boasts a financial strength rank of 4 out of 1o and a profitability rating of 7, while its price-earnings ratio stands at 8.77 and its forward price-earnings ratio is 5.43. Additionally, its price-to-owner earnings ratio is 11.61 and it has a price-to-free cash flow ratio of 32.27. These figures indicate Delta Air Lines is positioned well in terms of profitability and earnings.
However, there are also some areas of concern. The three-year total revenue growth rate is only 2.5%, while the three-year total Ebitda growth rate is -17.8% and the three-year earnings per share without NRI growth rate is -34.4%. These figures suggest Delta has faced challenges in growing its earnings and revenue in recent years. Moreover, the company's current ratio is 0.46 and its quick ratio is 0.41, indicating potential liquidity issues.
Additionally, the debt-to-equity ratio is 3.40 and the debt-to-Ebitda ratio is 5.73, which highlights that the company has a relatively high level of debt.
In conclusion, Delta exhibits strong fundamentals and a solid financial position, making it a strong competitor in the airline sector. However, it is crucial to consider the potential challenges the company might face in terms of liquidity and debt management. Nonetheless, the market seems to be underestimating Delta's strong fundamentals, which suggests it be a good opportunity for investors to consider this undervalued airline stock.
