U.S. Airliners Hit Turbulence: Sell or Buy?

For the past few days, several major U.S. airliners have run into turbulence. The selloff was sparked off yesterday when Lufthansa cautioned that 2014 sales and earnings may underperform initial estimates. So Germany’s top airliner reduced its forecast for FY 2014 operating profit from €1.5 billion to €1 billion. Lufthansa is being cautious in the wake of labor union strikes and weaker-than-expected traffic in its passenger and cargo businesses. On the revenue side, Lufthansa’s market share is being chipped away by emerging competitors from the Gulf region like Emirates, Etihad and Qatar Airways. Lufthansa shares plunged after the announcement, and the selling activity traveled across the pond to affect U.S. airlines. In the past two days:

  • United Continental Holdings (UAL) has fallen over 12%.
  • Delta Air Lines (DAL) is down over 9%.
  • Southwest Airlines Co. (LUV) has pulled back approximately 7%.
  • JetBlue Airways Corp. (JBLU) has declined nearly 6%.

Is the U.S. airline industry grounded, or does this pullback present a buying opportunity?

For three of the four stocks above, I’d say it’s the latter. For now, Lufthansa and its rivals operates on completely different routes from the U.S. carriers so its struggles shouldn’t impact these airliners in the near-term. Many analysts consider these threats to be largely isolated to Lufthansa.

As you can see from the chart below, two of these stocks are doing quite well in shoring up their financial statements and remain compelling buying opportunities: Delta Air Lines Inc. (DAL) and Southwest Airlines Co. (LUV).

Top Airliner #1: Delta

Delta Air Lines 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. Just last week, DAL shares rose to a record high after it reported strong May results. Much of the growth stemmed from the company’s growing international footprint, especially newer flights to and from Latin America.

Last month, traffic on Delta Air Lines advanced 5.8% to 17.73 billion miles. Domestic travel improved 6.8% while international travel climbed 4.2%. Passenger revenue for each seat flown one mile (an important revenue metric for airlines) jumped 7% over May 2013. The company also boosted its passenger-carrying capacity by 3.6%. The fact that traffic increased faster than capacity meant that the average Delta flight became more full, rising from 84.8% a year ago to 86.5%.

The strong May results are a good sign for the company’s next quarterly announcement. Over the past ninety days, the analyst community has hiked up the consensus earnings per share (EPS) estimate from $0.82 to $1.02–a 24% increase. For FY 2014, the consensus EPS estimate has jumped 16.9% to $3.05 per share. Delta is an A-rated Strong Buy.

Top Airliner #2: Southwest

And if you’re looking for a stable stock to own during somewhat uncertain times, you’d do well to fly with Southwest Airlines (LUV). 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 company regularly tops the list for Airline Quality Ratings in overall service.

Add in a 0.9% dividend yield and a billion-dollar stock buyback program and it’s not difficult to see that shareholders LUV this stock too. But what I really like about Southwest Airlines is its sales and earnings projections for the next several quarters. This quarter, the company is expected to post 39.5% earnings growth; for FY 2014 the company is headed towards 34.8% bottom-line growth. Then again, with the company’s strong track record of earnings surprises, the sky is the limit for Southwest. LUV is also an A-rated buy.

My Recommendations for JBLU and UAL

Meanwhile, JetBlue is a solid B-rated buy and United Continental is a C-rated hold. So these two airliners wouldn’t be my top pick for new money, but it’s clear that this group as a whole is doing much better than its European counterparts. My recommendation is that you use this near-term pullback as an opportunity to pick up DAL and LUV shares on the cheap…before they take off to new heights once again.

Sincerely,

Louis Navellier

Louis Navellier

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