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James Li
James Li
Articles (1538) 

3 Airline Stocks to Consider on Stimulus Hopes

Stocks are modestly undervalued based on the GF Value Line

October 07, 2020 | About:

In light of President Trump urging Congress to promote aid for airlines, three airline stocks that have a cash-to-debt ratio of at least 0.5 and are modestly undervalued based on the GuruFocus Value Line are Southwest Airlines Co. (NYSE:LUV), Alaska Air Group Inc. (NYSE:ALK) and JetBlue Airways Corp. (NASDAQ:JBLU) according to the All-in-One Screener, a Premium feature of GuruFocus.

Dow sparks liftoff on airline aid hopes

On Wednesday, the Dow Jones Industrial Average closed at 28,303.46, up 530.70 points from Tuesday's close of 27,772.76 and a net 154.82 from Monday's close of 28,148.64.


The President of the United States tweeted that the House and Senate should "immediately approve" $25 billion for airline payroll support and $135 billion for paycheck protection program support for small businesses. The latest tweets come on the heels of Donald Trump halting on Tuesday stimulus talks with Democrats: The Dow tumbled approximately 375 points on Trump's tweet that he rejected Speaker of the House Nancy Pelosi's counteroffer of $2.4 trillion.

Pershing Square manager Bill Ackman (Trades, Portfolio) advocated in his tweet that Congress and the president should immediately fund the $1.6 trillion that the two parties agreed to and then leave the disputed funds for after the election.

GF Value classifies stocks using an exclusive method

On the heels of Trump bolstering support for airlines, investors can consider airline stocks that are modestly undervalued according to the GF Value, a website-exclusive method that classifies stocks as undervalued, fairly valued or overvalued based on the stock's historical price multiples, an internal adjustment based on a stock's past returns and estimates of a stock's future growth. However, if a stock becomes significantly undervalued, it could be a possible value trap if financial strength and profitability measures begin to deteriorate. Thus, we will focus on the modestly undervalued airline stocks only.

Southwest leads in terms of cash-to-debt ratios

Using the Screener's "eye" and filter-ranking features, one can display the stocks with the highest cash-to-debt ratios at the top of the table. Figure 1 shows a snapshot of the Screener's "Fundamental" tab with the eye for cash-to-debt opened, indicating that the user has added the cash-to-debt column to the Screener view.

Figure 1

Figure 1 also shows a "green thumbs up" icon next to cash-to-debt, suggesting that the higher a stock's cash-to-debt ratio is, the higher the stock's return based on a correlation analysis of September backtesting data. The efficiency rank of 10 shows a strong positive correlation between cash-to-debt and stock returns.

Southwest's cash-to-debt ratio of 1.27, the highest among the airlines on the Screener results list, outperforms 80.21% of global airline competitors. Despite this, GuruFocus ranks the Dallas-based airline's financial strength 5 out of 10, weighed down by debt ratios underperforming over 63% of global airlines.


Shares of Southwest closed at $38.59, showing they are modestly undervalued with a price-to-GF Value of 0.88.


Gurus with holdings in Southwest include PRIMECAP Management (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).


Alaska Air Group

Shares of Alaska Air Group closed at $37.02, which are modestly undervalued with a price-to-GF Value of 0.72.


GuruFocus ranks the Seattle-based airline's financial strength 5 out of 10: Although the company's cash-to-debt ratio of 0.65 outperforms 69.91% of global competitors, Alaska Air has a weak Altman Z-score of 1.15 and a debt-to-equity ratio that underperforms 64.92% of global airlines.



Shares of JetBlue closed at $12.29, which are modestly undervalued with a price-to-GF Value ratio of 0.79.


GuruFocus ranks the New York-based airline's financial strength 3 out of 10: Although the company's cash-to-debt ratio of 0.52 outperforms 64.76% of global competitors, JetBlue has a weak Altman Z-score of 0.91 and a debt-to-equity ratio that underperforms 72.06% of global competitors.


Disclosure: The author is long Southwest as of this writing. The correlation research only gives a rough understanding of how the Screener filters were correlated with stock returns over a specific period. GuruFocus updates the filter rankings monthly.

Past performance does not indicate future results and thus should be used with caution. Further, investors should conduct their own careful research before investing in the stocks mentioned.

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