The price of Nymex Crude Oil has been moving steadily lower in recent weeks since hitting a 3-month high of $105 per barrel on June 27. Since then, the price has declined over 15 percent, and shows signs of dropping further in the future. Lower energy prices are bullish for numerous sectors of the market, such as consumer discretionary services, which include restaurants and clothing retailers. Airlines also stand to benefit from lower energy prices, since fuel is a major operating expense.
The U.S. airline sector has already staged an impressive rally so far this year. The New York Stock Exchange Arca Airline Index is up approximately 12 percent year-to-date already. Declining fuel prices should provide further tailwinds to this sector.
What are we looking for? We will search for U.S. airlines with reasonable valuations and strong growth prospects, which may benefit further from the declining price of oil. We will use Recognia Strategy Builder to screen for stocks in the U.S. airline sector with compelling fundamentals.
We begin by setting a minimum market capitalization threshold of $500 million to focus on larger, more established airlines in our search. Next, we will look for companies that are reasonably valued-based in their earnings by filtering based on price-to-earnings ratio, or P/E ratio. We will consider only stocks with a trailing P/E ratio of 30 or less.
To further filter based on growth prospects, we will use the estimated earnings-per-share, or EPS, growth rate. By comparing this year’s estimated earnings to last year’s, we will select only companies forecast by analysts to grow their earnings by at least 10 percent.
Finally, in order to focus on companies with scalable business models, we will select only firms with revenue-per-employee of at least $250,000. Companies with higher revenues-per-employee are better able to scale their businesses without adding new costs.
What did we find? Recognia Strategy Builder uncovered eight companies matching the criteria we set.
Delta Airlines. This airline is the largest company appearing on our screen with a market capitalization of over $29 billion. The company is very reasonably valued, with a trailing P/E ratio of just 2.8. Delta also has among the highest revenue-per-employee number, indicating the company can scale its business costs effectively if conditions warrant. Delta recently released very good second quarter results, with passenger revenue up 9 percent.
Southwest Airlines. This Dallas-based company is the second largest airline in our screen with a market capitalization of $22.2 billion. The stock has the strongest earnings growth estimates for the coming year, with an estimated EPS growth rate of 225 percent.
Spirit Airlines. It also ranks highly on our screen. Spirit operates as a low-cost airline, and has the highest revenue-per-employee on our screen. The company is also reasonably valued with a trailing P/E ratio of 21. In early October, the company issued a statement guiding lower on third quarter operating margins, which resulted in a 5 percent one-day drop in the stock price.
Hawaiian Holdings This is a holding company whose primary asset is the common shares of Hawaiian Airlines. Based in Honolulu, Hawaiian Airlines offers service within the Hawaiian Islands as well as to the rest of the U.S. The company is the smallest on our screen with a market capitalization of just $700 million. The company has a low P/E ratio at 9.4 and has demonstrated strong annual EPS growth over the previous five years. In July, the company announced second quarter earnings which handily beat analysts’ estimates.
The above companies represent interesting investing opportunities in light of the recent declines in the price of crude oil. Many of these companies developed very efficient operating models in past years of high fuel prices. We would expect to see improved operating earnings as a result of the lower costs these airlines will enjoy as a result of lower fuel costs.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is the vice president of retail & self-directed investing for Recognia, the industry leader in providing global retail investors with actionable insights to make confident trading decisions. Ashton is directly responsible for empowering the trading community of over 20 million investors to which Recognia is provisioned by ensuring all aspects of the company’s client service delivery including the distribution of in-depth investment research culled from Recognia’s patented investing analytics.
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