One interesting thing about earnings season is that competitors seem to schedule their announcements around the same time. Two weeks ago, it was the banks that all reported. Last week was all about the consumer products companies. And this week, the big domestic airlines have taken to the runway. And there are certainly some compelling profit opportunities in this industry.
American Airlines (AAL) is too new to qualify for Portfolio Grader, but when you run the others—Delta Airlines Inc. (DAL), JetBlue Airways Corp. (JBLU), Southwest Airlines (LUV), United Continental Holdings (UAL)—through my stock screening tool, a clear divide emerges:
As you can see, two of these airliners are ready to take to the skies while the other two will likely remain grounded for quite some time. Now that we’ve established which fall into which category, let’s take a closer look at the two A-rated buys:
Two Airlines to Buy
No Delta Blues Here
First up, Delta Airlines is one of the oldest and largest airline companies in the United States. In addition to commercial airlines, the company also operates a number of air freight companies, small package delivery services as well as capital management companies. In total, Delta Air Lines commands a fleet of 700 aircraft and operates over 5,000 flights every day to nearly 250 destinations.
Shares of DAL have taken off up after the airliner reported a sharp increase in first-quarter earnings. During the first quarter, Delta Air Lines saw traffic improve 3.5% and capacity rise 1.7%.This is somewhat remarkable as the airliner reported $90 million in lost revenue as a result of 17,000 flights cancelled due to the severe winter weather.
Compared with Q1 2013, net income skyrocketed 2,943% to $213 million, or $0.25 per share. Adjusted earnings were $0.33 per share, which topped the $0.29 consensus estimate by 14%. Over the same period, total operating revenue climbed 5% to $8.92 billion. This matched analyst estimates. For the upcoming quarter, Delta expects between 14% and 16% operating margin growth. The airliner also forecasts unit revenue growth in the mid-single digits and system capacity to grow between 2% and 3%.
LUV is in the Air
If you’re looking for a stable stock to own during somewhat uncertain times, you’d do well to fly with Southwest Airlines. As the world’s largest low-cost carrier, Southwest Airlines dominates U.S. air space. And through its recent acquisition of AirTran Airways, the company has grown its international presence by leaps and bounds.
In an industry plagued with politics and regulations, Southwest is by far the most efficient passenger airline in the U.S. And there’s good reason that this stock’s ticker symbol is "LUV": The latest Airline Quality Ratings are in for 2013, in which Southwest Airlines provided the highest overall quality of service on record. It made the top 10 in terms of overall service.
Southwest Airlines posted an impressive first quarter report. The company’s net income skyrocketed 485% to $152 million, or $0.22 per share, including $26 million of special items. This is a sharp increase from last year’s profit of $59 million, or $0.08 per share. Excluding special items, adjusted earnings amounted to $126 million, or $0.18 per share. And despite a significant reduction to revenues from weather-related cancellations, the company’s operating revenues were $4.17 billion, matching analyst estimates.
Now that both of these companies have proven themselves during earnings season, I have no reservations in recommending either of them for the long haul.