The average airline stock in the S&P 1500 Index has gained 17% in 2019 after losing 25% in 2018, notes Richard Moroney, editor of Dow Theory Forecasts, who highlights two airline stocks that he believes are poised to catch up.
SkyWest (SKYW) shares have returned 26% including dividends so far this year, rebounding from a 16% loss in 2018. SkyWest has a market value of $2.9 billion, ranking among the smallest airlines in the S&P 1500 Index.
Founded in in 1972, SkyWest uses smaller, low-cost airplanes to transport passengers between major hubs and smaller cities. SkyWest mostly operates its flights under code-sharing agreements with large U.S. airlines, which pay the company a fixed rate and some operating expenses, such as fuel.
SkyWest shares appear to have a long runway for more gains. At 11 times trailing earnings, the stock trades at a 22% discount to its five-year median.
With management forecasting low-double-digit profit growth in 2019, the consensus expects per share profits to climb 11%, lagging the airline industry’s average of 23% projected growth. But analyst estimates are up sharply over the past 30 days.
For the month of January, SkyWest reported 6% higher block hours, which measure the time between departing one terminal and arriving at another. SkyWest, earning a Quadrix Overall score of 97 (our of 100), is a Best Buy in our small cap advisory, Upside.
A highly cyclical stock, Southwest Airlines (LUV) can be susceptible to the gyrations of a volatile market. The shares plunged 19% in final two months of 2018, only to rally 17% in 2019.
Last month, Southwest reported a strong December quarter and provided upbeat guidance. But in late February, Southwest warned that lingering soft demand from the partial government shutdown will reduce March-quarter revenue by roughly $60 million.
It had initially estimated $10 million to $15 million in lost revenue from the shutdown. Southwest now expects unit revenue to increase 3% to 4% in the current quarter, down from its prior outlook of 4% to 5% growth.
At 13 times trailing earnings, Southwest looks expensive compared to rest of the airline industry, fetching more than a 25% premium for both trailing earnings and estimated 2019 profits.
Yet Southwest still appears unusually cheap versus its own history, trading at a 14% discount to its five-year median trailing P/E, while its industry averages a 9% discount. Southwest Airlines is a Long-Term Buy.
