Airline stocks on the move
Posted
Sep 11 2009, 05:30 PM
by
Anthony Mirhaydari
Rating:
Airline stocks were big movers this week after the release of positive analyst reports from J.P. Morgan and Barclays Capital. This helped push up the airline sector in particular and transportation stocks in general. UAL Corp. (UAUA), the parent of United Airlines, gained 21.4% this week while US Airways (LCC) gained 19.2%. Compare this to the 2.6% rise in the S&P 500.
Transportation stocks tend to act as a leading indicator for both the broad market and the economy, so bullishness here is a good sign traders believe the economy is healing.
I snagged copies of both reports. The team at J.P. Morgan believes that we won't see any airline bankruptcies this winter based on better-than-expected revenue trends in July and August as well as stable fuel prices. In their words, they suggest "everyone makes it, this time." Barclays Capital believes many "underestimate the potential for a significant airline revenue recovery."
These are very optimistic outlooks to be sure, especially in light of the 27% peak decline in revenue we saw earlier this year. But the analysts are still willing to recognize that the industry faces long-term challenges in that revenue growth has now decoupled from GDP growth. This is the result of increased competition, drastic fare cuts as the recession deepened, and the increased use of travel alternatives like video conferencing.
J.P. Morgan analysts are looking for industry revenue to expand 5.5% next year. Gary Chase at Barclays Capital finds that while revenue expectations are currently higher for low-cost carriers like JetBlue (JBLU) history suggests it is the legacy carriers like United and Delta (DAL) that provide the greatest leverage to economic recovery. This is because they are more exposed to business travel and international markets instead of budget-conscious consumers. Chase finds that during the last three downturns revenue from international routes recovered twice as fast as the domestic market.
One potential way to play the recovery would be the Claymore Airline ETF (FAA). It was launched earlier this year and is still lightly traded. Another option would be the broader iShares Transportation ETF (IYT). It moved over its 2009 high last month and is up 89.2% since the March low. It lags the broad market year-to-date however, up 15.4% versus the 15.4% rise in the S&P 500. As for individual picks, I'll be adding AMR Corp. (AMR), parent of American Airlines, to my portfolio at Wall Street Survivor.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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