It’s been a quiet year for U.S. airlines even after threats of a price war dissipated in the early months of the year. But at least two of the airline companies have been standouts in the marketplace, beating peers on some key valuation metrics.
One of the companies happens to be Warren Buffett (Trades, Portfolio)’s. The “Oracle of Omaha’s” 10% stake in United Continental Holdings (UAL, Financial) is certainly flying higher these days.
Buffett owns 27.7 million shares of the nation's third-largest airline by market cap, which in spite of a handful of publicity nightmares earlier this year, jumped in value. United's operating margin stood at nearly 9%, or lower than 75% of its peers in the industry.
Chicago-based United’s rate of return shot up 20.5% year to date. At market cap of $21 billion, the airline also has been able to increase its cash-to-debt ratio, improving its liquidity position. The ratio is a key indicator among capital-intensive airlines, signaling their financial strength, as measured by their cash, cash equivalents and marketable securities divided by debt obligations. United’s cash-to-debt was reported at 0.35. The industry median is 0.54. United’s cash-to-debt has reached a high of 2.44 compared to a low of 0.07 over the last decade, GuruFocus data showed.
The other high-flying performer in the skies this year, so far, has been the small-to-mid-cap stock of SkyWest Inc. (SKYW, Financial). The Utah-based airline helps connect major airlines and large hubs to smaller outlying cities.
SkyWest, which has a Piotroski F-Score of a very well-run company, has produced a rate of return of 8.8% year to date. The company has an operating margin of 12.42%, which is higher than 68% of the industry and is expanding. David Dreman (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Jim Simons (Trades, Portfolio) were reported its largest guru shareholders in the first quarter.
SkyWest’s cash-to-debt ratio was reported at 0.23, lower than more than 70% of the industry. The company’s range has been a low of 0.16 to a high a 4.29. GuruFocus indicated a warning sign that showed the company had issued more than $829 million in debt over the last three years.
GuruFocus' industry overview pages of the airline industry shows its current top players by market cap. The leader was Delta Air Lines (DAL, Financial) with 26.6% of the industry, Southwest Airlines Co. (LUV, Financial) with 23.9% and United with 15.4%. SkyWest held 2.2% of the industry in terms of market cap. Other players include American Airlines Group (AAL, Financial) and Alaska Air Group Inc. (ALK, Financial)
Here’s a closer look at United and SkyWest and analysts’ outlook for the future.
United Continental Holdings
Buffett has made an estimated return of 30% since he initiated his position in the third quarter of 2016. He bought shares at $49. In Friday trading, the stock sold for almost $80 a share.
The GuruFocus median price-sales chart shows the stock is trading above historical value. It is trading at 11 times its price-earnings, which is higher than 60% of its peers in the Global Airlines Industry.
Analysts foresee a bright future for the airline. Revenue is estimated to hit more than $45 billion in 2020, up from this year’s roughly $39 billion to $40 billion. The company’s earnings before interest, taxes, depreciation and amortization, or EBITDA, are estimated to hit $6.6 billion in 2020, up from $6.3 billion in 2018. GuruFocus noticed only one severe warning sign with the airline. That is, its assets growth is faster than revenue growth, which can indicate fewer efficiencies. Its operating margins are expanding.
Chase Coleman (Trades, Portfolio) and David Tepper (Trades, Portfolio) initiated positions in the airline in the early months of the year.
SkyWest Inc.
Dreman has gained an estimated 39% rate of return on SkyWest since he opened the position. The shares were purchased in the fourth quarter of 2013 for an average price of $15.23 a share. The stock stood at more than $60 a share on Friday.
Just before market close, the stock jumped more than 5% in trading. It was trading at 7 times price-earnings for a price-earnings ratio that is higher than 78% of its competitors. The company pays shareholders a dividend yield of 0.61.
GuruFocus' median price-sales chart indicated the stock is trading above historical value.
However, the Peter Lynch chart shows it is trading well below fair value.
Analysts forecast revenue of $3.44 billion in December 2019, compared to revenue of $3.2 billion in December 2018. The company is projected to grow EBITDA to $969 million.
The company struggled to turn a profit in 2019, but reported net income of more than $20 million in 2018. Revenue was reported at $3.2 billion.
