Best airline stocks

By: ispeculatornew
Date posted: 01.20.2010 (5:00 am) | Write a Comment  (5 Comments)

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I am one of those who has always been fascinated by airplanes and I can’t imagine ever getting tired of getting onboard of one. But investing in a commercial airline is a whole other story. There are so many reasons to avoid getting involved and yet hope always remains. These companies struggle to remain profitable but there are always believers that now is the right time and that eventually they will get a break.

The problem of course is that airline stocks depend on many factors that are outside of their control, namely:

Terrorism: Attacks like September 11 or even smaller ones such as the Detroit Christmas scare are enough to scare away some consumers which has a direct impact on prices

Economy: As the economy goes, so do airlines. Why? Yes sure people travel more and further away for vacations when they have more money and confidence but what is even more true is that business class passengers (those who bring up the big bucks right?) tend to pay a lot more attention to money spent when things are tougher. That 8,000$ last minute flight to Paris will likely just not happen if things are going badly and shareholders are breathing down the board’s neck!

Oil prices: On the expense side, we’ve already seen the impact that oil prices can have on airlines. The decision to hedge prices or not can be a killer in one sense or another. Lock in a 100$/barrell oil when prices go up to 150$ and you will be laughing as competitors struggle to keep up with your prices. But if you do that and prices dip down to 50$.. You might want to get ready for Chapter 11.

And so yes, it is an unprofitable industry (in general, there are exceptions) and one that could raplidly find itself in need of a bailout if things went badly (i.e. another September 11). But there are some smaller and younger companies that have been doing very well in recent years. Take a look below at the graph of Southwest Airlines, one of the more efficient companies around.

And so here you have it, the table of the US airlines, and you can quickly notice that the majority do not even have a P/E ratio. That is of course because they are not making profits! But find the right airline and you might just make a great investment.

Which one would you consider owning?

TickerNamePriceDividend YieldPayout Ratio
PRKPark National Corp75.454.9875.04
TICCTICC Capital Corp10.1411.4462.26
EDConsolidated Edison Inc53.564.7162.3
NENoble Corp plc30.764.8924.31
IEPIcahn Enterprises LP108.65994.610.82
RIGTransocean Ltd42.3555.2934.81
VZVerizon Communications Inc46.894.5251.73
GMLPGolar LNG Partners LP30.296.9157.03
ARCCAres Capital Corp18.0458.4274.28
TAT&T Inc32.385.6953.24
SIXSix Flags Entertainment Corp35.51015.2941.93
ESVEnsco PLC50.535.9328.61
MAINMain Street Capital Corp33.445.9349.02
ARLPAlliance Resource Partners LP80.85.9361.99
PDLIPDL BioPharma Inc8.3757.1739.6
SEPSpectra Energy Partners LP45.474.825.93
AHGPAlliance Holdings GP LP615.4379.22
HCLPHi-Crush Partners LP37.595.43N/A
PDHPetroLogistics LP11.7510.21N/A
PMPhilip Morris International Inc78.974.7667.71
CVICVR Energy Inc36.18.3N/A
SXCPSunCoke Energy Partners LP29.166.4462.27
OBOneBeacon Insurance Group Ltd14.765.6954.37
DKLDelek Logistics Partners LP33.474.92N/A
ORIOld Republic International Corp15.044.7941.39
NTINorthern Tier Energy LP24.386.7N/A
KKRKKR & Co LP24.547.855.68
EMESEmerge Energy Services LP46.1058.69N/A
NMFCNew Mountain Finance Corp14.679.2779.95
WPTWorld Point Terminals LP20.165.95N/A

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5 Comments

  1. Comment by Zavi — January 20, 2010 @ 10:01 am

    Nice picture. We know that government had decided in December to increase security measures for all flights to the United States (because of the December 25 incident on Northwest airlines). Because all these reasons you mentioned, the industry of private business jets and executive jet charters had explode the past few weeks!! They can increase flexibility and enhance your privacy and security. And prices are not that bad considering the time saved! Maybe that’s the future?

  2. Comment by IS — January 25, 2010 @ 7:25 pm

    @Zavi – Yes I see your point but even those companies have suffered. Think about all of those public reactions to executives spending money on private business jets? I don’t agree with those calls to justice but they are there.

  3. Comment by Positroll — January 29, 2010 @ 11:53 am

    Pinnacle Airlines.

    Market cap: 150 mio. FCF 2009 should be approx. 75-80 mio. (normalized 55+). Tangible net book value: way above $12 / share. Growing its business. Trading at a mere $ 8 (but steadily rising since after the Colgan crash, which is covered by insurance).

    Earnings don’t really matter, due to comlicated tax situation after Northwest bankruptcy (they got and will get big tax refunds for loosing money which they did by buying Colgan Air and are still doing by buying new planes (Q400s) for Colgan).

    The balance sheet looks not too great on first glance due to GAAP accounting regarding a “deferred revenue liability” of 216 mio. arising out of the Northwest bankruptcy that can be ignored as it does not require the company to deliver any services or make any payments at all.

    A little older but still interesting:
    http://seekingalpha.com/article/118144-pinnacle-airlines-risk-reward-makes-it-worth-a-look
    “In 2008, 75% of Pinnacle’s revenue was generated under “Capacity Purchase Agreements”. This is a cost plus model where Pinnacle’s airline customers such as Delta/Northwest assume many of the risks that typically make airline earnings cyclical and volatile. Pinnacle does not assume fuel risk or consumer demand risk and is reimbursed for costs such as insurance and airport landing fees.”
    These contracts continue for the next 7 years, so imO a 7 year multiple on FCF seems to be the minimum for any “fair value” discussion.

    More current discussion:
    http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_P/threadview?m=te&bn=22930&tid=3619&mid=3619&tof=16&frt=2#3619

    The future:
    http://www.centreforaviation.com/news/2009/12/14/smaller-regional-jets-doomed-pinnacle-discusses-expected-industry-changes/page1
    (though I expect PNCL to reduce their DAL flying less than indicated in the article due to Mesa going belly up and DAL probably adding former JAL flying.

  4. Comment by IS — February 4, 2010 @ 9:07 am

    @Positroll – thanks a lot for those comments, are you a holder of Pinnacle?

  5. Comment by Positroll — February 4, 2010 @ 12:02 pm

    Yes. Bought a little at $ 6 a long time ago, held on (too long), started heavy buying below $ 2,50 when they recovered after the Colgan crash (as investors were reassured that insurance would cover all costs), sold 1/4 aroung 6.60, holding another 1/4 until we get to $10-12 and the remaining half for fair value …

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