Wondering why airline stocks are soaring? Look no further than the fact that they’re producing returns greater than their cost of capital, something they’ve rarely–if ever–done before. Deutsche Bank’s Michael Linenberg and team explain:
Bloomberg News The majority of US airlines – 8 out of our universe of 11– produced returns that exceeded their cost of capital for 2013. This represents an improvement from a year ago when 6 out of 11 airlines produced returns that exceeded their cost of capital. That was not the case several years ago when most US airlines failed to cover their cost of capital…
Of the 8 publicly-traded US airlines that generated a positive [Return on Invested Capital – Weighted Average Cost of Capital] gap, Allegiant Travel (ALGT) generated both the highest absolute after tax ROIC (16.5%) and the greatest "spread" (ROIC – WACC of 10.3 points). Furthermore, Allegiant's very strong results were an improvement over what it reported in 2012: 15.4% after tax ROIC and ROIC – WACC spread of 9.0 points.
Spirit Airlines (SAVE), Delta Air Lines (DAL), Alaska Air (ALK) and American Airlines (AAL) ranked behind Allegiant and all had ROIC – WACC spreads that were 4 – 5 points. We are of the view that an airline with ROIC – WACC spread of at least 3 points (based on the industry's historical WACC) has sufficient flexibility to pay down debt, re-invest in the business, and pursue pro-shareholder initiatives. If current trends hold, we believe United Continental (UAL) with a 2.3 point spread (produced in 2013) will be well-positioned to return capital to shareholders by 2015.
Would you be surprised to learn that Linenberg and team are still bullish on airline stocks? They explain:
For 2014, IATA is projecting a $9.2 billion net profit for the North American airline industry, almost triple the next geographic region, Asia Pacific at $3.2 billion. This outperformance by the US airline industry has found its way into the stocks which have been very strong over the past three years (e.g. Delta Airlines +309%, Alaska Air +188%, and US Airways/American Airlines +403%). We continue to believe that there is still ample upside to the group and maintain Buy ratings on many of our names. However, we think investors may want to consider less crowded stocks such as United Continental (large cap), JetBlue (JBLU) (small cap) and Republic Airways (RJET) (micro cap) whose shares could outperform the sector as they improve their ROIC – WACC gaps (in fact, JetBlue and Republic Airways both have ROIC < WACC).
Top Life Sciences Stocks To Own Right Now
Shares of Allegiant Travel have gained 0.6% to $114.62 at 1:47 p.m. today, while Spirit Airlines has dropped 0.6% to $62.02, Delta Air Lines has fallen 0.4% to $39.35, Alaska Air has dipped 0.2% to $94.72, American Airlines has risen 0.8% to $42.19, United Continental has declined 1.9% to $43.08, JetBlue Airways has slipped 1% to $10.42 and Republic Airways has ticked up 0.1% to $10.62.
No comments:
Post a Comment