U.S. Airline Stocks Have Soared on Vaccine Hopes. Here’s Where You Can Find Better Value.
Airline stocks have bounced back on hopes for a Covid-19 vaccine.
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Airline stocks have rallied so much on a flurry of positive vaccine news that valuations and price targets are now matching analysts’ estimates.
If there are any bargains left, it may be in the carriers focused on hard-hit areas like business and international travel—along with some foreign carriers that are operating in increasingly consolidated markets, including Brazil’s Gol Linhas Aereas (ticker: GOL) and the European low-cost leader Ryanair Holdings (RYAAY).
The NYSE Arca Airline Index has surged 30% in November, rising on hopes that vaccines for the coronavirus will soon be approved. Investors are looking past the recent spike in new cases and lockdown measures, anticipating that 2021 will be a big rebound year.
It is a compelling narrative. And it has pushed many stocks and valuations close to analysts’ targets. Indeed, the low-cost domestic leisure carriers—in the sweet spot of the recovery—are now trading around their average valuations over the last five years, and are close to analysts’ price targets.
Allegiant Travel (ALGT), for example, has been the best U.S. airline stock this year, down just 9% this year.
But at $158 a share, Allegiant now trades just 3% below analysts’ average target of $162.50, according to FactSet. Raymond James analyst Savanthi Syth wrote this week that she expects Allegiant’s stock outperformance to continue. The airline has done an exceptional job of managing costs and capacity, and it expects to turn cash-flow positive this quarter. It is also seeing less competitive pressure in its core leisure markets, according to Syth, and should have opportunities to add aircraft to its fleet at deeply discounted prices.
But while Syth maintained a Strong Buy recommendation, she left her price target of $155 intact. Shares now trade at 13 times estimated 2022 earnings, slightly above their average price-to-earnings ratio of 12.5 before the crisis. More gains in the stock will have to come from that multiple continuing to rise and/or the airline beating estimates handily.
Other low-cost domestic leisure carriers are also looking fully valued. Southwest Airlines (LUV) trades at 16 times estimated 2022 earnings, well above its five-year average of 12 times forward earnings, though some analysts expect the stock to continue posting gains. Spirit Airlines (SAVE) also has its fans on Wall Street, despite a somewhat full valuation. Shares trades around 10 times 2022 earnings, in line with its five-year average.
Spirit stock, at around $20, is right at analysts’ average target. Southwest, at $45.83, is about 6% below the average target of $48.65.
Multiples for the full-service network carriers are also looking full as investors look ahead to a recovery in international and business travel, which are critical to their profits. Delta Air Lines (DAL), the strongest full-service carrier, trades at 9 times estimated 2022 earnings, in line with its five-year average. After a big rally lately, the shares trade just 6% below the average target price of $40.
United Airlines Holdings (UAL) may have even less upside, trading just 3% below the average target of about $42. It also trades around 10 times estimated 2022 earnings of $3.90 a share.
American Airlines Group (AAL) is expected to post a slim profit of seven cents a share in 2022, giving it a P/E ratio of 184. American has the most highly-leveraged balance sheet and has been issuing far more equity than other carriers to shore up its liquidity, diluting its shares outstanding. Its stock, at $12.70, has also been rising, and now also trades above analysts’ targets, averaging $10.60 a share.
While there may be no more bargains in the sector, some of the more intriguing stocks are those of foreign carriers. Brazilian carrier Gol, for example, isn’t cheap: It trades above analyst’ price targets and fetches 29 times estimated 2022 earnings of 29 cents a share (based on its American depositary receipts).
But Brazil’s market is rebounding more quickly than the U.S., and Gol is capitalizing. The airline increased flight capacity by 34% in October to 363 flights a day and had a load factor of 78% (referring to the percentage of seats with ticketed passengers).
Citigroup’s Stephen Trent maintained a Buy on the stock this week, writing that Gol “looks well positioned to exit the pandemic on solid competitive ground.” He maintained a $10 target on the shares, implying gains of 18% from recent prices around $8.44.
Ryanair Holdings (RYAAY), Europe’s leading low-cost carrier, is also richly priced, but looks well-positioned. The airline is expected to earn $6.75 a share in 2022, giving it a P/E ratio of 15 at recent prices around $104. And the stock has blown past analysts’ average target of $88.
But Europe’s market is consolidating as many carriers scale back capacity or go bust. Norwegian Air Shuttle filed for the equivalent of bankruptcy protection this week, the latest carrier to fall victim to the coronavirus crisis. Other European carriers that have failed or scaled back sharply include Virgin Atlantic, SunExpress Deutschland, Flybe, and Alitalia.
Ryanair is well-capitalized and is likely to gain share from other carriers in a recovery. That justifies at least some of its stock premium—though whether it can lift off from here will depend on the virus being contained, which is out of the Ireland-based carrier’s control.
Write to Daren Fonda at [email protected]
