Do airline stocks have room to soar?

September 19, 2017 11:26 AM

Summer is the time Americans look to travel to their favorite vacation spots, whether to a lake, a beach or the mountains; and this year folks appear ready to go. The Airline Transportation industry in July was ranked by Zacks Industry Rank System at #13 out of 265 industries. That puts this 25-company strong group in the top 5%. Year-to-date returns have been 19.8%, nearly doubling the 10.8% return of the S&P 500. This indicates a nice share price outperformance. Can it continue?

Putting a share price bottom in July 2016, airline stocks soared in the second half of 2016 and first half of 2017, led by two of the three biggest players: American Airlines (AAL) and United Continental (UAL).

Global commercial airlines made record net profits in 2016 of about $35 billion, according to the International Air Travel Association (IATA). That’s way up from nearly $14 billion in 2014, and about the same as in 2015. North American commercial airlines felt the upswing the most, representing about $20 billion of that 2016 profit.

However, for 2017, forthcoming IATA travel revenue data may be lower. Airlines shoulder a lot of significant risks, particularly macro factors such as sudden shifts in personal disposable income and spending patterns, safety concerns over terrorist attacks, oil price shocks and analyst sentiment. All of these can turn quickly and weigh on airline profits.

In addition, the United States’ welcome mats have been selectively removed from our airports. The world’s tourists (more broadly) have taken notice.

Prior to March 2017—the time of the second Presidential executive order travel ban—New York had forecast an increase of 400,000 foreign visitors to the city in 2017. Forecasts made after the travel bans predicted a decline of 300,000 foreign visitors to New York in 2017.

Let’s see what actually happens. The U.S. Supreme Court allowed parts of the travel ban to stand and will hear arguments and write its opinion on the travel ban later this year or early next year.

As to longer-term risk management, look for order deferrals on large aircraft. This is an indicator of how airlines view future demand.

The top Zacks #1 Rank (strong buy) airline picks are: Air France (AFLYY), American (AAL), Delta (DAL) and Southwest (LUV).

Why these four? Share price momentum is clearly on (see “Best in flight,” above). The long-term Zacks value, growth and momentum (VGM) score is “A” in all four cases. There is more future growth to chase at a reasonable current stock price.

About the Author

John Blank, Zacks Research