Airlines are seeing record numbers of travelers this year. All of which could provide a good deal of lift for currently undervalued airline stocks.
Better yet, according to the Federal Aviation Administration (FAA), flight cancellations in the first half of the year were at 1.4%, the lowest in over a decade. “This year’s record-breaking air travel is another good sign for our economy as more Americans take to the skies than ever before,” added Transportation Secretary Pete Buttigieg.
In addition to these efficiencies, according to the International Air Transport Association (IATA), revenue could reach $996 billion this year. Unfortunately, those numbers haven’t had a big impact on most airline stocks just yet. Most of that has been courtesy of higher labor and oil costs, and new airplane delays at Boeing and Airbus. Still, don’t write the sector off. Instead, buy the temporary weakness in undervalued airline stocks, such as:
American Airlines (AAL)
American Airlines (NASDAQ:AAL) stock has been a disaster.
After running into turbulence with a cut to its adjusted EPS numbers, the AAL stock gapped from about $14 to a current low of about $11. However, at this point, the pullback is overkill. With a good deal of negativity priced into the stock, buy and hold it long-term.
Triggering the latest downfall, American Airlines cut its adjusted EPS numbers to between $1 and $1.15 for the second quarter from a prior range of $1.15 to $1.45. Revenue per available seat mile is also expected to fall between 5% and 6%, worse than the 1% to 3% drop forecast.
We also have to consider AAL is trading with a forward price-to-earnings ratio of just 4.93. Its price-to-earnings-growth ratio just slipped to 0.14. And it’s trading at just 0.15x sales.
Sure, there’s a good deal of negativity here, but most has been priced in on the gap.
United Airlines (UAL)
United Airlines (NASDAQ:UAL) is also severely undervalued.
At $47.20, it’s trading at 0.60x growth, at 0.28x sales, and just 4.5x earnings.
Not only is it fundamentally cheap, but UAL is also technically oversold on RSI, MACD and Williams’ %R. The last time UAL became this oversold was in late Oct. 2023, it bounced from a low of about $34 to $56 a few months later. I’m hoping we get a similar bounce back from $47.20.
Helping Citi analysts raise their price target on UAL to $96 from $80, with a strong buy rating. Jefferies also upgraded UAL to a buy rating with a price target of $65. The firm cited UAL’s investments in its product offerings and free cash flow generation as the reason for the move. Wolfe Research just upgraded UAL to an outperform rating, citing the potential for a big upside in the stock over the next six to 12 months.
Southwest Airlines (LUV)
There hasn’t been much love for Southwest Airlines (NYSE:LUV) lately.
Since June, it’s been consolidating at around $27.50.
All thanks to poor earnings projections and a note the company would miss second-quarter numbers. In fact, according to ViewfromtheWing.com, “Their previous ‘worst case scenario’ was projecting a 3.5% year-over-year drop in revenue per available seat mile. But things are worse than they’d previously suggested, now saying say down 4% – 4.5%.”
There’s even speculation CEO Bob Jordan’s job may be on the line, as Elliott Capital Management calls for change. However, it doesn’t look like Jordan won’t go without a fight, arguing that the company has a great plan moving forward.
As with other airlines, a good deal of negativity has been priced into the stock. I’d buy the latest weakness in LUV for the long haul.
On the date of publication, Ian Cooper did not hold (either directly or indirectly) any positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.