Clear Skies: The Top Airline Stocks

11/21/2003 12:00 am EST


Battling such issues as overcapacity, debt, labor problems, volatile gas prices, reduced business and leisure travel, and continued fears of terrorism, the airline industry has undergone massive changes in recent years. Despite this list of concerns, many of the leading advisors are bullish on the sector. Here are their top picks. (For more information on any of the advisors cited below, please click on their photos.)

Schaeffer, Bernie"JetBlue (JBLU NASDAQ) is a low-fare airline with arguably the most impressive bottom line among all US carriers." Says Bernie Schaeffer inThe Option Advisor. "Yet the stock has received little fanfare. Wall Street has disregarded the equity, as only one of nine covering analysts has named JBLU a ‘buy,’ with two outright ‘sells.’ Short sellers have been betting against this stock throughout its impressive seven-month rally. Short interest has increased to 7.15 million shares. And there have been numerous bearishly slanted articles that echo this bearish sentiment. Technically, the stock has vaulted 165% off its March low along solid support at its 10-week moving average. For options players, we recommend JetBlue March 55 call."  (Editors note: The stock has just split 3 for 2, and the strike price of the options noted above will adjust accordingly.)

Sunderman, JoeJoe Sunderman, director of trading at Schaeffer's Investment Research, adds, " AMR (AMR NYSE) recently announced break-even results for the third quarter compared to its loss of $5.93 per share for the same period a year ago. What's more, the firm saw an increase in revenue and a drop in operating expenses. From a sentiment perspective, investors remain overwhelmingly pessimistic. Puts easily outnumber calls in the front three months' of options. Furthermore, the number of AMR shares sold short soared to 48.3 million shares. At the stock's average daily trading volume, it would take more than a week to cover all these short positions, raising the chances of the equity benefiting from a covering rally. Traders should target 16 on AMR with a stop-loss on a trade below 13."

Fasciocco, Leo"Our latest featured breakout stock is Express Jet Holdings (XJT NYSE), which was a 2002 spin-off from Continental Airlines," says Leo Fasciocco, editor of The Ticker Tape Digest. "Express Jet is the second largest regional airline in the US, with annual revenues of $1.1 billion. Airline stocks are acting strong and XJT has been under massive accumulation. This year, we are forecasting a 30% increase in net to $1.80 a share. Going out to 2004, we are projecting a 16% improvement in net to $2.09 a share. The stock sells with a p/e ratio of only 9. On a valuation basis, XJT has the potential to show an expansion in its p/e to around 15. That would indicate the stock could climb to 27 based on earnings this year. We are very bullish on XJT. (We would note, however, that insiders have been heavy sellers, which is something to watch in coming months.) A protective stop can be placed near 14."

"We recently upgraded America West Holdings (AWA NYSE), a regional airline, to a buy rating," says Standard & Poor’sThe Outlook. "We have finally become convinced that the company has transformed itself from a money-losing, industry laggard on the verge of bankruptcy to a low-cost airline that is outperforming the competition. We expect a return to profitability in 2004. America West has been able to achieve this turnaround with the help of a $380 million loan guarantee by the Air Transportation Stabilization Board. The company was also able to get major wage cuts from its employees, which helped it become one of the lowest-cost major airlines. We forecast earnings of $0.90 per share for 2004, a great improvement from our operating loss estimate of $1.16 a share for 2003. In 2005, we see the company earning $1.20 a share. Our 12-month target price of $25 values the stock at 21 times our 2005 per-share earnings forecast, about in line with peer levels."

Dlugosch, James"The airline sector has made an impressive turn-around in 2003," says Jamie Dlugosch, editor of The Rational Investor."On the brink of disaster, the entire industry managed to cut costs and retrench in the face of decreasing load factors. As such, the airlines are poised for significant gains with increases in revenue. The operating leverage gained has been of tremendous benefit. With a burgeoning recovery, the turn-around has been quicker than expected. Northwest Airlines (NWAC NYSE) managed to turn a profit in its recent quarter. What’s impressive about NWAC is that the company returned to profit without the benefit of major wage concessions. That could be viewed as a negative as its recent success may limit its negotiating leverage. We take the opposing view as management uses this success to obtain cuts in order to enhance its competitive position, thereby making the situation more attractive for unions in the long run. Buy NWAC up to $15. Our target price is $30."

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