Stocks In Focus:
The three best airline stocks include a global airplane manufacturer, the world’s largest airline by fleet size and a transportation and logistics company originally dreamed up by a college student.
The airline industry has undoubtedly suffered a tumultuous two years due to the COVID-19 pandemic. Recent efforts to reboot the travel industry have been delayed by the emergence of the Delta and Omicron variants of COVID-19.
More than 2,600 flights were canceled on New Year’s Day 2022 due to the pandemic and staffing shortages. Soaring jet fuel prices have cut into airlines’ thin margins for the few planes that were able to reach the air. However, there is no better time to buy airline stocks than now.
The COVID-19 pandemic, labor shortage and high fuel prices have caused many airline stocks to drop significantly. Major travel corporations like American Airlines (NASDAQ:AAL) and Alaska Air Group (NYSE:ALK) are now trading at a fraction of their pre-COVID-19 share prices. The airline industry has become a treasure trove of bargain deals for savvy value investors.
Despite the last two years taking a significant bite out of nearly every travel company’s revenue and profits, almost all major American airlines remain financially stable. Most have stockpiled billions of dollars of cash reserves on their balance sheets, enabling them to ride out the COVID-19 pandemic for years to come.
However, it appears the travel industry rebound that airlines have eagerly been waiting for is right around the corner. With the Omicron variant seemingly progressing towards an “endemic,” multiple governments worldwide have announced the easing of pandemic restrictions from England to Israel, spurring future travel and tourism prospects. Consumers have already displayed an eagerness to return to air travel, with millions of passengers flying daily during Thanksgiving and Christmas 2021.
Airline stocks have taken a significant hit in recent years, but with the global economy slowly but surely returning to normalcy, the industry offers an opportunity for value investors to reap returns multiple times over. Here are the three best airline stocks to buy now.
3 Best Airline Stocks to Buy Now: #3
Boeing Co (NYSE:BA)
Boeing Co. (NYSE:BA) is an American aerospace and defense company headquartered in Chicago, Illinois. Founded in 1916, the company is one of the oldest and largest airplane manufacturers globally, with a market capitalization (market cap) of $126.9 billion. Today, Boeing’s presence stretches across the aerospace industry, developing and manufacturing airplanes, rockets, missiles, satellites and telecommunications equipment for civilian and government entities worldwide.
Boeing has undoubtedly experienced a rough three years, starting with the grounding of its Boeing 737 MAX commercial airliner and ending with the COVID-19 pandemic disrupting the global travel and tourism industry. The company’s stock has more than halved since early March 2019, when it reached $440.00 per share. BA currently trades around $215.00. However, Boeing remains one of the best airline investments available in the stock market.
Boeing’s first sign of trouble occurred in October 2018 when a 737 MAX crashed shortly after taking off from Soekarno–Hatta International Airport in Jakarta, Indonesia, resulting in the death of all crew members and passengers. Following a second fatal 737 MAX crash in Ethiopia in March 2019, aviation agencies around the globe moved to ground the plane.
Since its introduction in the 1960s, the Boeing 737 has become the most successful airliner in history and the backbone of Boeing’s business. As a testament to the aircraft’s versatility, Southwest Airlines’ (NYSE:LUV) 700-plus plane fleet is entirely composed of different Boeing 737 models. At the time of the groundings, Boeing had an order backlog for more than 4,600 737 MAX aircraft. The 737 MAX was originally projected to account for roughly a third of the company’s revenue for the next five years.
The COVID-19 pandemic dealt a second blow to Boeing in early 2020 by shutting down the global travel industry. Airlines quickly began canceling orders for planes after traveler counts and company revenues nose-dived. Boeing experienced 843 airplane order cancellations from January to June 2020.
Although “rough” is a mild way to put Boeing’s challenges over the past three years, the company has begun to rebound. The first bit of good news came when Boeing raised $25 billion in funding in a debt offering in April 2020. The company had initially hoped to raise $10-$15 billion, but the Federal Reserve slashing interest rates helped drive investor interest. The offering allowed Boeing to avoid seeking a government bailout.
Finally, after extensive upgrades and repairs to all outstanding Boeing 737 MAXs, the planes have resumed flights in much of the world, including the United States, India, the European Union (EU), Canada and Australia, among other countries and regions. China announced in early December 2021 that the airplane could resume flights in early 2022. There are now more operational 737 MAXs than prior to the groundings in Spring 2019. In response, Boeing is planning to drastically increase its 737 MAX production from 19 aircraft per month in October 2021 to 31 per month in early 2022.
The company has also emptied its “whitetail” stock. Whitetails are aircraft with no designated buyer. Whitetails are usually rare since most planes are custom ordered. However, due to the 737 MAX groundings and COVID-19 pandemic, Boeing was left with 450 whitetail aircraft worth approximately $16 billion in late 2020. As a sign of its rebound, Boeing, in mid-2021, announced it had less than 10 whitetails in stock, a huge win for the company.
It is important to understand that as one of only two major airplane manufacturers in the world and a North Atlantic Treaty Organization (NATO) defense contractor, Boeing has the backing of the U.S. government. The United States even fought a 17-year, multi-billion dollar trade dispute with one of its closest allies, the EU, against Airbus for Boeing. The trade dispute officially ended in June 2021. Boeing is irrevocably tied to the United States, making the company an incredibly safe long-term bet for investors.
BA has remained relatively stagnant with a 1.7% increase in share price over the trailing 12 months. BA’s stock price over the past year is graphed below, along with a 50-day moving average.
Despite its recent rebound, Boeing’s plans for a full recovery by the end of 2022 have been delayed by the emergence of the Delta and Omicron variants of COVID-19. However, the company still boasts tremendous upside. Boeing is projected to see its sales grow by 26.8% in Q1 2022 and 31.7% in 2022 as a whole. Using Airbus’s current multiples, BA returns a valuation of $300-$330 per share based on 2023 estimates. Boeing is quietly planning a return to the spotlight.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $269.29, 25.7% higher than its latest closing price of $214.19, earning BA a “BUY” recommendation from Stock Rover and a place among our three best airline stocks to buy now.
3 Best Airline Stocks to Buy Now: #2
FedEx Corp (NYSE:FDX)
FedEx Corp (NYSE:FDX), formerly known as Federal Express Corp and FDX Corp, was founded in 1971 as a more modern and efficient alternative to the United States Postal Services. The company, headquartered in Memphis, Tennessee, has grown into the third-largest courier company globally, with a market cap of $66.4 billion. FedEx primarily provides transportation and logistics services with additional offerings in customs brokerage, supply management and billing and collections.
As a transportation and logistics corporation FedEx likely will not rise to the forefront of most investors’ minds when evaluating airline stocks. However, the company was initially launched on the idea that air travel was a feasible medium of delivering mail. Founder Fredrick W. Smith, while attending college, proposed in a 1965 term paper that dedicated cargo airplanes were a more efficient form of mail delivery compared to traditional trucks or passenger airplanes. Despite receiving a “C” on his report, the idea of air cargo would never escape his mind, and Smith would eventually found the Federal Express Corporation in 1971.
The rise of global e-commerce has shaken up many industries and companies, and airlines are no exception. E-commerce sites ship millions in packages daily, which requires sophisticated storage and transportation networks. While warehouses and distribution centers have become major investment areas for REITs and private equity firms, air freight has become an increasingly important source of revenue for airlines.
The global air cargo industry is now worth $110.8 billion and possesses significantly better profit margins than the passenger airline industry, 7.2% versus 2.1%, respectively. The air freight industry is only expected to expand as e-commerce continues to grow. The air cargo market is projected to see a compound annual growth rate (CAGR) of 8.0% over the next seven years, from 2021 to 2028.
Even traditional airline companies have shifted operations towards the air cargo industry. American Airlines and United Airlines (NASDAQ:UAL) now operate more cargo than passenger flights.
Although the increasing attractiveness of air freight has brought additional competitors into the industry, the high cost of developing a global cargo delivery network has allowed FedEx to build an extremely defensible market position. The company has seen its revenue grow by a CAGR of 10.2% over the last five years. FedEx remains the largest freight airline globally, delivering over 17.5 billion metric tons of air cargo annually. The closest competitor, Qatar Airways, only handles 13.0 metric tons of air freight annually.
FedEx is a mature company, meaning it is not expected to experience high sales growth in the coming years. The company is currently forecasted to see its revenue climb by only 10.8% in 2022. However, FedEx is not a growth stock but a value investment, meaning its share price is undervalued relative to its current financials. Value investments are less risky since their valuation is largely based on their current cash flows rather than hypothetical future revenue and profits. As a bonus, value investments have consistently outperformed growth stocks historically.
FDX’s (share) price-to-equity (P/E) ratio of 13.8, enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio of 8.4 and (share) price-to-sales (P/S) ratio of 0.8 are all well below the industry average. The integrated freight and logistics industry averages are 22.8, 12.8 and 1.1, respectively.
In recent months, FedEx has seen its share price dip due to labor shortages and supply chain disruptions causing lower earnings. However, a quick analysis of the ratios above proves that the market has over-adjusted. The company maintains a healthy cash reserve of $6.8 billion on its balance sheet and a low debt-to-equity ratio of 1.5, making it a very financially healthy corporation. FDX is a hidden gem in the airline industry for sharp-eyed value investors.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $321.07, 28.1% higher than its latest closing price of $250.74, earning FDX a “BUY” recommendation from Stock Rover and a place among our three best airline stocks to buy now.
3 Best Airline Stocks to Buy Now: #1
Delta Airlines Inc (NYSE:DAL)
Delta Airlines Inc (NYSE:DAL), founded in 1925, is an international airline headquartered in Atlanta, Georgia. Delta Airlines is the world’s largest airline by fleet size, with over 894 airplanes in its portfolio and a market cap of $24.9 billion. The company offers passengers and cargo transportation, professional security, aircraft management, training and consulting, vacation packages and repair and maintenance services.
Long-term customers are the greatest source of revenue for nearly every company. Satisfied customers buy or use a company’s product at higher rates, are less sensitive to price fluctuations, provide referrals and are less expensive than finding new clients. The airline industry is especially susceptible to customer satisfaction, with many fliers driven by brand loyalty rather than price differences.
However, numerous airlines have encountered significant public backlash and negative press in recent years. Consumers have grown increasingly disgruntled due to issues such as declining legroom, extra fees and flight delays. Multiple major mishaps with airline passengers have done nothing to help the industry’s image. Although airline ratings have improved in the COVID-19 era, the industry consistently scores as one of the worst in customer satisfaction in recent decades. Industry giants like United Airlines and Spirit Airlines (NYSE:SAVE) can frequently be found on lists of the most disliked companies in America.
The issue of customer service has grown ever more important as airlines look to rebound from COVID-19. Even as airline customer satisfaction rates have remained steady as travelers flock back to air travel, there are dark clouds on the horizon for multiple companies in the industry: McKinsey & Co. report rising negative sentiments, especially amongst business travelers, the most frequent customers for airlines. The consulting firm estimates that there is potential for a significant wave of dissatisfied airline customers in the coming years.
Delta Airlines has emerged as the exception in a travel industry that has struggled to keep consumers happy. Delta Airlines consistently remains one of the best airlines regarding customer satisfaction and experience. The company won the 2021 J.D. Power North America airline satisfaction survey with a record-breaking score of 860. Delta Airlines and its subsidiary, Endeavor Air, also possess the highest percentage of on-time arrivals and best customer service ratings among all American airlines.
Like nearly all companies tied to the travel industry, Delta Airlines has taken a hit due to COVID-19, with the company experiencing a 3.6% decline in its stock price over the past 12 months. DAL’s change in price over the trailing 12 months is charted below, alongside a 50-day moving average.
However, the company’s focus on customer satisfaction has provided the company with an increasingly positive outlook despite recent losses due to COVID-19. Delta Airlines is forecasted to experience a 43.5% jump in revenue in 2022, with Q1 and Q2 year-on-year sales growth expected to surge by 121.9% and 169.4%, respectively. Furthermore, the company has managed to cut its debt-to-equity ratio by nearly half, from 23.2 in January 2021 to 13.1 in January 2022, while maintaining $13.2 billion in cash reserves, ensuring the airline’s financial stability.
Despite recent customer dissatisfaction with the industry, air travel remains a necessary form of transportation and features inelastic demand. As a result, dissatisfied customers will not stop flying but instead seek to change airlines, providing Delta with a significant long-term advantage over its competitors.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $60.00, 35.8% higher than its latest closing price of $38.84, earning DAL a “STRONG BUY” recommendation from Stock Rover and a place among our three best airline stocks to buy now.