Airlines: Quantitative Buys

05/11/2016 9:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

To select stocks, Richard Moroney uses a proprietary ranking system known as Quadrix; in his latest Dow Theory Forecasts, he highlights two airline stocks that score highly on their overall Quadrix ratings.

Alaska Air Group (ALK) earned $1.45 per share in the March quarter, up 29% and $0.03 above the consensus. Revenue rose 6%, roughly in line with analyst expectations.

Low fuel costs (down 29% in the quarter) fattened profit margins, a trend that has helped airline results for the last two years.

Alaska trimmed its unit costs 11.7% in the quarter, managing a 1.2% decline excluding fuel. That operating efficiency, coupled with aggressive buybacks (share count down 5.2% over the last year) has kept profits rising at double-digit rates in 10 straight quarters.

The consensus projects profit growth of 15% in 2016, slowing to 3% in 2017, in part because of expectations that fuel costs will rise.

Estimates don’t take into account the planned $2.6 billion acquisition of Virgin America (VA), expected to close late this year or early next year.

Capacity rose 12.9% in the quarter, outstripping an 11.0% increase in traffic. The company expects capacity growth to slow to 11% in the June quarter and 8% for the year, with unit costs excluding fuel continuing to decline. Alaska Air is a Long Term Buy in our model portfolio.

Southwest Airlines (LUV) earns a Quadrix Overall score of 100, a Quality score of 99, and a Reranked Overall score (one of our two sector-specific ranks) of 99, all good for tops among S&P 1500 airlines.

Southwest earned its high Quality score via remarkably consistent growth. Sales have risen in each of the last 14 quarters and per-share profits in the last 12.

The consensus projects more of the same — sales growth of 6% this year and 5% next year, with profits up 21% this year and 9% in 2017.

In the March quarter, Southwest earned $0.88 excluding special items, up 33% and topping the consensus by $0.04, while revenue increased 9% and operating cash fl ow 11%. Citing solid bookings in April, the company expects unit revenue to rise in the June quarter.

At 11 times estimated 2016 earnings, Southwest trades 15% above the industry median, a premium justified by the company’s steady history and ability to grow traffic faster than capacity.

However, Southwest’s trailing P/E ratio of 12 is 36% below its three-year average of 18.9. Southwest is a Long-Term Buy.

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Richard Moroney, Editor of Dow Theory Forecasts

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