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Why Airline Stocks are Worth Considering

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Andrew R. Michaud

• October 17, 2023

Airline stocks have faced their fair share of challenges recently, causing them to plummet. However, their current low valuation makes them an irresistible opportunity.

The Impact of External Factors

The decline in the U.S. Global Jets exchange-traded fund (JETS), which includes major airlines such as Delta Air Lines (DAL), United Airlines Holdings (UAL), JetBlue Airways (BLU), and American Airlines Group (AAL), can be attributed to various factors. One significant factor is the surge in oil prices due to the conflict in Israel. As fuel constitutes a significant portion of airlines' expenses, rising oil prices directly affect their profit margins. Additionally, concerns regarding economic demand, sales growth, and persistently high interest rates have contributed to the overall decline in the stock market since late July.

Adjusted Estimates Paint a Concerning Picture

Analysts have made downward revisions to the aggregate 2024 sales estimates for the airline companies within the ETF. Although the revision stands at a modest 0.2%, the impact on projected earnings for the same period is far more substantial, with estimates being slashed by 23%. Such a substantial decline in earnings suggests potential erosion of profit margins in the near future.

The Silver Lining: Attractive Valuations

While the decline in earnings estimates is significant, the drop in stock prices has been even more pronounced. Consequently, this has led to a reduction in the price-to-earnings multiples of these airline companies. The JETS ETF, for example, now trades at an estimated 8.6 times earnings for the next 12 months, compared to 9.3 times just three months ago.

A Promising Opportunity?

Though it remains uncertain when and how the fundamentals of these airline companies will improve, it is plausible that the worst has already been priced into their stocks. Importantly, the JETS ETF currently trades at approximately half the price/earnings multiple of the S&P 500. Such a significant discount warrants serious consideration. Furthermore, historical data shows that the ETF has previously traded at even steeper discounts, but it has also reached multiples closer to those of the broader market index during periods when airlines were highly favored by investors.

In conclusion, airline stocks present an intriguing investment opportunity. Their current depressed valuations, combined with the potential for future improvements, make them primed for a potential turnaround. Investors should carefully weigh the attractive risk-to-reward ratio these stocks currently offer.

Airline Stocks: A Promising Opportunity for Buyers

Buyers are showing increased interest in airline stocks, with the ETF rising to around $16 on Tuesday morning, despite the U.S. indexes experiencing a slight decline. It seems that buyers consistently step in to support the ETF at the $15 or $16 level whenever there are selloffs, a trend that has been observed since the summer of 2020.

According to Doug Bycoff, the chief investment officer of the Bycoff Group, the airlines have become more stable as a group after reducing their numbers. This support is not surprising, considering that United Airlines is scheduled to report its earnings after the market closes on Tuesday. There is potential for a strong report, as lowered earnings estimates might result in an easy beating of expectations. This positive outcome could potentially lift the stock, which has already experienced a decline of around 30% since its peak in July.

Additionally, if Delta's strong earnings report on October 12 is any indication, which saw sales of $14.6 billion rising by 13% year over year and highlighted "steady" demand both domestically and internationally, it is possible that United's revenue could surpass expectations and drive profits higher.

The earnings report from American Airlines is set to be released on Thursday morning.

While earnings certainly hold significance, another factor that could positively impact airline shares is the price of oil. WTI Crude oil has reached the high $80s per barrel, but it has consistently declined from the low $90s area over the past year. Any easing of geopolitical tensions could result in a sharp drop in oil prices. However, even without a significant decline, it will be challenging for oil to surpass the low $90s threshold without a sudden surge in global economic demand. This puts a floor under profit-margin estimates for airlines.

Given these factors, investing in airline stocks at this time could potentially provide a boost to one's portfolio.