The ugly face of terrorism resurfaced once again last week with the terror attacks at the Brussels airport and the Maelbeek metro station in central Brussels, claiming over 25 lives and injuring more than 200 people. Such acts of terror are unfortunately becoming more frequent. The twin attacks came close on the heels of the arrest of the sole surviving person to have participated in the Paris attacks in Nov 2015. The Paris attacks had resulted in more than 125 deaths, leaving several others injured.
The recent attacks in Brussels, like the Paris attacks, adversely impacted travel stocks. Airline companies across the globe were not outside the ambit of the same. The Brussels explosions have resulted in security being tightened not only in the European airports but elsewhere as well.
Long-Term Impact Unlikely
The negative impact of the attacks on airline stocks can be gauged from the fact that the NYSE ARCA Airline index has declined approximately 2.6% since the tragedy. In fact, the Atlanta, GA-based Delta Air Lines DAL has stated that its passengers were amongst the casualties reported in the departure area at Brussels' Zaventem Airport on March 22.
However, the impact of such terror attacks is likely to be short-term in nature. This is in keeping with the trend that market weakness resulting from such anti-social incidents is usually short-lived, especially when the frequency of occurrence is rapid, as has been the case of late. Moreover, according to media reports, US carriers do not have a huge exposure in Belgium. This should further limit the damage caused to stocks in the US airline industry.
Cheap Oil-Led Positives Should Outweigh Terrorism Impact
Airline stocks have been witnessing good times, mainly on the back of plunging oil prices. Soft oil prices have resulted in massive savings for carriers, courtesy a sharp reduction in their operating expenses as fuel costs represent a significant chunk of an airline’s costs.
Despite the recent rally, oil prices are still hovering around the $40 a barrel mark, a long way off the highs of mid-2014 when the commodity had traded in excess of $100 a barrel. Naturally, this has aided the bottom line of carriers significantly resulting in impressive performances with respect to earnings per share.
Apart from impressive bottom-line performances, cheap oil has improved the financial health of carriers significantly. To illustrate this, take a look at American Airlines Group AAL. The carrier has been generating huge profits ever since it came into existence in late 2013 in the current form, courtesy the merger of AMR (American Airlines' parent group) and US Airways. However, prior to the merger, American Airlines had filed for bankruptcy in 2011.
Thanks to their solid financial health, many carriers have ramped up their buyback activities apart from hiking their dividend payouts. Profit sharing activities have also touched new highs. Moreover, stronger balance sheets have prompted many carriers to make increased investments aimed at improving their infrastructures to further bolster the flying experience of travelers. With cheap oil fueling so many positives, we believe these have the potential to negate the negative impact of terror attacks like the one in Belgium, thereby continuing to make airlines an attractive bet.
Healthy Zacks Industry Rank and Bullish View
The Zacks Industry Rank #35 for the “Trans-Airline” segment places it at the top 1/3rd of the 260+ member industry group and indicates the group’s near-term Positive outlook. The fact that oil is unlikely to touch the highs of mid-2014 any time soon implies that airline stocks will continue to see good times taking into stride occasional hiccups like the Belgium attacks.
The International Air Transport Association’s (IATA) 2016 upbeat projection further corroborates our bullish stance on stocks in the space. IATA expects profitability in the space to increase to $36.3 billion which is more than double the figure recorded in 2014, when oil prices were higher.
5 Solid Picks
Given such bullish fundamentals, we believe airlines remain an attractive bet despite short term negative impacts of heinous acts of terrorism. Consequently, we continue to advise investors to add airline stocks with strong fundamentals to their portfolios.
This is where our VGM score enters the scene. Here, V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select solid winners. However, it is important to keep in mind that each Style Score will carry different weights while arriving at a VGM score.
We have narrowed our search to the following stocks based on the combination of a healthy Zacks Rank and VGM score.
Air France-KLM SA AFLYY, based in Paris, is a provider of passenger transportation services on scheduled flights. Air France sports a Zacks Rank #1 (Strong Buy) and a VGM Score of ‘A.’ The company has an expected earnings growth rate in excess of 100% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 4.20, lower than the industry average of 8.70.
SkyWest SKYW was founded in 1972 and is headquartered at St. George, UT. SkyWest carries a Zacks Rank #2 (Buy) and a VGM Score of ‘A.’
The company has an expected earnings growth rate of 8.6% for the current year, well above the industry average of 1.8%. Its earnings estimate for the current year has improved by 2.4% over the last 60 days.
Deutsche Lufthansa Aktiengesellschaft DLAKY, based in Cologne, Germany, is one of the leading carriers in Europe. It sports a Zacks Rank #1 and a VGM Score of ‘A.’
The forward P/E ratio for the current financial year is 4.82, much lower than the industry average. The carrier has seen its earnings per share estimate for 2016 go up 6.93% over the last 30 days.
Hawaiian Holdings HA, the holding company of Hawaiian Airlines, was founded in 1929 and is headquartered at Honolulu, Hawaii. Hawaiian Holdings has a Zacks Rank #1 and a VGM Score of ‘B.’
The company has an expected earnings growth rate of 48% for the current year. Over the last 60 days, the 2016 Zacks Consensus Estimate of earnings has gone up 18.1% to $4.57 per share. It has a PEG ratio of 0.33, lower than the industry average of 0.55.
Controladora Vuela Compañía de Aviación, S.A.B. de C.V., or Volaris VLRS, is an ultra-low-cost carrier, with point-to-point operations, serving Mexico and the United States. The carrier has a Zacks Rank #2 and a VGM Score of ‘B.’
Over the last 60 days, the 2016 Zacks Consensus Estimate of earnings has gone up 6.6% to $1.29 per share.
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