Stocks in the airline space have been struggling lately due to multiple headwinds like higher fuel costs and the havoc created by Harvey. However, major sector participants breathed a sigh of relief as the impact of Irma was not as severe as forecasted in Florida. In fact, Irma has been downgraded to a tropical depression.
Carriers Fly High Led by American Airlines
Buoyed by the weaker-than-expected impact, most airline stocks flew high on Sept. 11 after being grounded lately. Major gainers included the likes of American Airlines Group Inc. (AAL - Free Report) , Delta Air Lines, Inc. (DAL - Free Report) , United Continental Holdings, Inc. (UAL - Free Report) , Southwest Airlines Co. (LUV - Free Report) , JetBlue Airways Corp. (JBLU - Free Report) and Alaska Air Group (ALK - Free Report) .
With a high proportion of sector participants trading in the green, it was of little surprise that the NYSE ARCA Airline Index had a field day. The sector tracker ended the trading session at $107.69, up 2% from the closing price on Sep 8.
In fact, the rally was not limited to airline stocks as major indices gained handsomely. The S&P 500 gained 1.1% to close the trading session at a record 2,488.11 with American Airlines leading the show. The Dow Jones Industrial average treaded past the 22,000 mark for the first time since mid-August. The Nasdaq Composite Index also closed at 6,432, gaining 1.1%.
The surge was mainly owing to the change in course of Irma. Consequently, Miami and Orlando escaped the projected extreme devastation as the storm moved westward.
Markedly, American Airlines, which has significant exposure to Florida and operates multiple flights from Charlotte and Miami on a daily basis, was naturally a big benefactor. The stock gained 5.2%, ending the trading session at $45.86.
Delta and American Airlines Bullish on Q4
In September 2017, many airline stocks including the likes of United Continental and Southwest Airlines had trimmed their respective unit revenue projections for the current quarter with the Harvey-induced revenue loss being the main culprit. The rise in fuel costs, which again may be Harvey-induced, also has not helped matters.
However, airline heavyweights — Delta and American Airlines — sounded bullish regarding their prospects in the final quarter of the year.
Last week, at the Cowen Global Transportation Conference, American Airlines had declared that it expects to perform better with respect to total revenue per available seat miles (TRASM: a key measure of unit revenue) in the fourth quarter compared with the current quarter.
Moreover, the carrier forecasted lower year-over-year growth with respect to another key metric — cost per available seat miles — excluding fuel and other special items. The metric is expected to grow at approximately only 3% in the final quarter compared with the 5% growth projected in the current quarter.
Delta also appeared to be optimistic about a rebound in the fourth quarter at the same investor conference, on the back of healthy demand for leisure travel. The bullish commentary of two of the biggest airline players in the United States bodes well for the sector, indicating that all is not lost with a rebound possible from the recent struggles.
Both Delta and American Airlines carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Industry Rank Holds Out Hope
The Zacks Industry Rank of 87 (out of 250 plus groups) carried by the Zacks Airline industry further highlights the fact that despite the recent struggles, the sector remains an attractive investment option. Notably, the favorable rank places the companies in the top 34% of the Zacks industries.
We put our entire 250-plus industries into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1.
Click here to know more: About Zacks Industry Rank
Valuation Signals More Upside
The impressive Zacks Industry Rank is well supported by the segment’s attractive valuation. Going by the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio, which is often used to value airline stocks, given their significant debt levels and high depreciation and amortization expenses, the industry doesn’t look expensive at this point.
The industry currently has a trailing 12-month EV/EBITDA ratio of 7.6, which is better than what the industry saw in the last five years. The ratio is almost near the low end of 5.1 during the period.
Additionally, the reading compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is at 10.9 and the median level is 9.4. The industry’s favorable positioning compared to the overall market certainly signals more upside as well.
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