By Teresa Rivas
Modern air travel may be a headache for passengers, but it is even worse for shareholders. Nonetheless, there are times when investors can make money from the space, as long as they don't stay for the long haul.
Although there has been a huge boom in travel demand postpandemic, that hasn't helped airline stocks much, as no major U.S. carrier's shares have retaken their prepandemic highs.
In fact the big three legacy carriers -- American Airlines, Delta Air Lines, and United Airlines -- along with Southwest Airlines, Alaska Air Group, JetBlue Airways, and Spirit Airlines, are all in the red over the past five-year period. Only Delta is near the break-even point. Before that was a mixed bag, too, with the industry slow to recover from the 2008-09 financial crisis.
"It is no secret the airlines are tough businesses, and highly volatile stocks," begins Melius Research analyst Conor Cunningham in his latest overview of the sector. That may not sound like an auspicious start, but he goes on to argue that "every few years the stars align and the stocks significantly outperform -- that time may be now."
Part of the problem is that airlines are often caught in a dilemma -- if they don't add capacity when demand is elevated, another airline will. Furthermore, even periods where major players are largely in accord on capacity -- as was the case in the first half of the last decade -- tend to be short-lived, with airlines reverting to their old ways, leading to profit-crunching price wars.
That said, if investors time it right they can make hay while the sun shines on the friendly skies. As Cunningham notes, more rational capacity growth beginning in 2012 meant airline margins climbed from 6.5% in 2011 to 11% in 2014, with stocks rising +340% in that period. Today, he argues, is an eerily similar setup, meaning we are in the early innings of a bullish cycle for the stocks.
Cunningham attributes this to the fact that legacy airlines and some stronger players appear poised to outpace smaller ones. Companies such as Delta, United, and Alaska are all in good shape in terms of margins, and will likely be able to take market share as the more growth- and low-cost airlines pull back. And because these airlines tend to focus on more profitable fares, rather than offering the lowest ticket prices possible, that could act as a positive backdrop for the sector, especially if smaller domestic players follow suit.
The analyst anticipates earnings improvement and projects industry margins to rise by 135 basis points in 2025.
"This structural shift is exactly what the US domestic market needs," he writes. "Outperformance isn't so farfetched in a no-to-low growth environment."
That leads him to upgrade Alaska to Buy with a $56 price target, some 20% above where the shares stood Monday around $47. His other Buy-rated stocks, Delta and United, also have targets that imply more than 30% growth, at $66 and $95, respectively.
"We are more bullish on airlines today than we've been in a long while," he concludes.
Technical analysis complements his bullishness, too.
John Kolovos, chief technical market strategist at Macro Risk Advisors, highlights the US Global Jets ETF, which has climbed some 50% this year, to a recent $23.21. JETS has been rising steadily since the market's early August selloff, and now scores "towards the top of the longer-term rankings, and when we look at the chart, a massive two-year base/bottom has formed, which carries significant long-term ramifications for the troubled industry."
The upshot is that if JETS can sustain levels above July 2023 -- the last time it traded above $20 -- investors "can be aggressive on pullbacks to position for a return back to all-time highs or a 50% objective," he writes.
In short, airline stocks may be like flights themselves -- not something you really want to spend a long time in, but they can get you where you need to go.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 28, 2024 13:26 ET (17:26 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments