According to a recent Barron’s report, Martin D. Sass, Chairman and CEO of MD Sass Investors Services Inc, a value-oriented hedge fund, expects shares for the top airline carriers in the United States to raise by 50%.
Changes forced by the global financial crisis, including consolidation, cost cuts, and fee hikes, have left the airline industry in the best financial shape in decades.
At the end of June last year, before fuel prices began tumbling, Wall Street predicted that the big four carriers, of which American Airlines Group Inc. (AAL) is maybe the best one, would grow their 2015 EBITDA by 7%. Now the forecast is for a growth of 40%. In these months, shares of American Airlines, but even of United Continental (UAL), Delta Air Lines (DAL) and Southwest Airlines Co (LUV)Ă‚ are up just 10% over the last 12 months.
Some of these major airline companies may see their shares raise sharply in the next year as profits soar on lower fuel costs and higher fares.
But Martin Sass sees one company above all the others. American Airlines is his top pick, and here are the reasons:
1. Shares are nowadays trading at $41, with a multiple of 7 times estimated earnings of 2015, a very cheap ratio if compared to United Continental that is trading at 9 times its earnings and Delta Air Lines that is trading at 30 times its earnings. The investor is 100% bullish when he talks about the industry but he has a special note for American, which is experiencing a “more fundamental and more recent turnaround than other airlines.”
2. The company’s return on equity is ranked higher than 98% of other companies in the Global Airlines industry and is even at the highest level ever reached. The previous best result for ROE was 49.15.
3. AAL earnings reported a record of $932 million in the first quarter of this fiscal year, easily overtaking its previous record of $480 million set last year. Of course, the managerial efficiencyof AAL can be seen in a pattern of positive earnings per share growth over the past two years.
4. If we look at airline domestic market share, we will find that AAL's merge with US Airway caused it to have big part of market and to reduce shares of its competitors.
5. The company has the higher yield of the “top 4”. Its dividend yield is 0.96%, while the yield of LUV is 0.73% and DAL's is 0.85%.
6. Looking at AAL past performance, we can see that the stock has slumped approximately 20% year-to-date. However, considering the current flight expansions, the airlines would benefit from an increase in airline’s passenger capacity and low crude oil prices.
In a recent interview, Mr. Sass said “To give you a little color on these names, we saw last year that the airline industry was going through a massive transformation as a result of decades of turbulence in the sector. Then there was tremendous consolidation and restructuring, and it left the industry with three carriers that dominate the U.S. market. These three so-called legacy carriers — American Airlines Group, Delta and United – have over 80% of airline traffic in the United States. We chose to go with American as our biggest position by far, but we also hold Delta. We believe these stocks will continue to be attractive. The fundamentals are attractive, earnings are growing at a significant rate and I think they will come in at above consensus forecast, with American, in particular, helped by the decline in the price of jet fuel since it doesn’t hedge and has no fuel profit sharing.“
Bottom line:
Positive growth of earnings per share will continue thanks to the growing performance of the business. Recently the company reported year-to-date traffic results with total revenue passenger miles (RPMs) for the month up 2.8% versus June 2014. Total capacity was up 2.4% versus June 2014. Also, total passenger load factor was up 0.4% versus June 2014. Of course the company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, notable return on equity and expanding profit margins.
The main mutual fund holder of AAL’s shares is Growth Fund of America Inc, which holds 3.37% of outstanding shares. T. Rowe Price Value Fund holds 2.27% of outstanding shares and Vanguard Total Stock Market Index Fund holds 1.77% of outstanding shares.
