Among the U.S. companies that made the “Greenblatt Yacktman” Screener, five of them are airlines: Alaska Air Group Inc. (ALK, Financial), Delta Air Lines Inc. (DAL, Financial), JetBlue Airways Corp. (JBLU, Financial), Southwest Airlines Co. (LUV, Financial) and United Continental Holdings Inc. (UAL, Financial). As these companies have soaring Greenblatt earnings yield and Yacktman forward rates of return, the airline industry offers high value potential.
A tale of two return ratios
Joel Greenblatt (Trades, Portfolio) and Donald Yacktman (Trades, Portfolio) define a company’s stock return differently: one works better for year-over-year comparisons while the other gives a more useful expected rate of return.
The Greenblatt earnings yield (EY) is simply the inverse of one of the EV ratios: the EV/EBIT ratio. Unlike the regular earnings yield, the Greenblatt EY ignores taxes and interest, which do not affect the company’s operational profitability. Since it does not consider the company’s growth, the earnings yield can overestimate the rate of return of cyclical companies, including airlines, during peak times.
On the other hand, Yacktman’s forward rate of return includes the company’s seven-year normalized free cash flow yield and the minimum value between the company’s total revenue growth and per-share revenue growth. As discussed in his GuruFocus interview, the former manager at Yacktman Fund (Trades, Portfolio)s does not set price targets. Instead, Yacktman researches the expected return of a company based on the current price, and compares the rate of return across industries.
The distribution of average Greenblatt earnings yields across industries is moderately left-skewed with a median near 6, while the distribution of average rates of return across industries has a median near 10. Only 9.22% of industries have an average EY of at least 10, and just 7.91% of industries have an average rate of return of at least 20.
Airline companies generate high rates of return
Throughout the past five years, the five airlines generally had increasing Greenblatt earnings yield, which suggests high growth potential in the short term. Among these five companies, Delta currently has the highest earnings yield, outperforming 93% of global airlines.
Among the five airlines, only Alaska Air and United had decreasing forward rates of return during the past five years. While Delta’s rate of return sharply increased during the second quarter of 2014, Delta barely has the second highest ROR among the airlines. Southwest has the highest ROR at 33.60%.
Delta has four good signs, i.e., its net warning signs is -4 based on the formula presented in a previous article. The Skyteam airline has a high profitability rank and expanding operating margins, which suggest high upside potential. Additionally, its dividend yield is near a five-year high. Among the airlines, only Alaska Air and Southwest have more good signs than does Delta. The former also has a 3.5-star predictability rank, and the latter has six good signs, the most among the airlines.
| Company | Number of Severe Warning Signs | Number of Medium Warning Signs | Number of Good Signs | Net Warning Signs |
| Delta Air Lines Inc. | 0 | 0 | 4 | -4 |
| United Continental Holdings Inc. | 1 | 0 | 1 | 1 |
| JetBlue Airways Corp. | 0 | 0 | 2 | -2 |
| Southwest Airlines Co. | 0 | 0 | 6 | -6 |
| Alaska Air Group Inc. | 0 | 0 | 5 | -5 |
Net Warning Signs = 2 * number severe + number medium – number good
See also
The Peter Lynch Growth Screener listed a few airlines as of Sept. 30, including Alaska Air, Allegiant Travel Co. (ALGT, Financial) and Hawaiian Holdings Inc. (HA, Financial). As airlines offer high growth and value potential, several gurus have increased their positions in airline stocks. Based on consensus picks data, 16 gurus have invested in Alaska Air during the past six months.
A previous article discusses one likely reason for the high margin growth among airlines: low cash conversion cycles. Premium members can find good investing ideas through all value screeners and over 150 guru portfolios. Additionally, the premium membership includes adequate access to some advanced features, including the Excel Add-in and the API, which the Premium Plus membership gives full access. Please review the membership benefits and sign up for a free seven-day trial.
Disclosure: The author has no position in any stock mentioned in this article.
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