Amid the pandemic-induced domestic and international air travel restrictions, the aviation industry suffered. However, the industry has witnessed significant improvements recently and is poised to remain resilient in the foreseeable future.
Although recession fears have sparked concerns about consumer spending, airline executives remain optimistic about travel demand which is not likely to wane any time soon. In 2023, the International Air Transport Association (IATA) anticipates the airline industry to tip into profitability and garner a global net profit of $4.70 billion.
Moreover, passengers are taking advantage of the return of their freedom to travel. A recent IATA poll of travelers across 11 global markets revealed that nearly 70% are traveling as much or more than they did prior to the pandemic. And, while the economic situation concerns 85% of travelers, 57% have no intention to curb their travel habits.
Furthermore, since people’s preference for air travel is rising, the need for low-cost services is also increasing. The global low-cost airlines market is projected to reach $302.85 billion by 2030, growing at a CAGR of 9.9% from 2022 to 2030.
Given this backdrop, fundamentally strong airline stock Copa Holdings, S.A. (CPA) might be a solid buy now. However, Virgin Galactic Holdings, Inc. (SPCE) might be best avoided due to its weak fundamentals.
Stock to Buy:
Copa Holdings, S.A. (CPA)
Based in Panama City, Panama, CPA provides airline passenger and cargo services. The company offers approximately 204 daily scheduled flights to 69 destinations from its Panama City hub to 29 countries in North, Central, and South America and the Caribbean.
In terms of forward EV/Sales, SPCE is trading at 1.49x, 14.3% lower than the industry average of 1.74x. Also, its forward EV/EBITDA multiple of 6.45 is 40.9% lower than the industry average of 10.92.
The stock’s trailing 12-month net income margin of 14.27% is 115.1% higher than the 6.63% industry average. Also, the stock’s trailing-12-month ROCE of 28.97% is 103.5% higher than the 14.24% industry average.
CPA’s total operating revenue in the third quarter that ended September 30, 2022, increased 16.7% from the prior quarter (ended June 30, 2022) to $809.45 million. Its adjusted net profit rose 773.8% sequentially to $115.06 million, while its adjusted earnings per share increased 809.4% from the prior quarter to $2.91.
Street EPS estimate of $2.60 for the fiscal first quarter ending March 2023 reflects a rise of 271.8% year-over-year. Its revenue estimate for the same quarter of $855.89 million indicates an improvement of 49.7% from the prior-year quarter. Additionally, the company topped consensus EPS estimates in each of the trailing four quarters.
Over the past six months, the stock has gained 37%, closing the last trading session at $92.08. It has gained 22.4% over the past three months.
This promising prospect is reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
CPA has an A grade for Quality and a B grade for Growth. Out of 31 stocks in the Airlines industry, it is ranked #7.
Beyond what we’ve stated above, we have also given CPA grades for Value, Momentum, Stability, and Sentiment. Get all CPA ratings here.
Stock to Avoid:
Virgin Galactic Holdings, Inc. (SPCE)
SPCE is an integrated aerospace company that develops human spaceflight for private individuals and researchers in the United States. It also manufactures air and space vehicles. In addition, it designs, develops, and manufactures spacecraft and engages in ground and flight testing and post-flight maintenance of spaceflight vehicles.
In terms of forward EV/Sales, SPCE is trading at 521.12x, significantly higher than the industry average of 1.74x. Also, its forward Price/Sales multiple of 871.86 is significantly higher than the industry average of 1.35.
The stock’s trailing-12-month ROCE of negative 54.33% compares to the industry average of 14.24%. Its trailing-12-month ROTA of negative 34.16% compares to the industry average of 5.21%.
SPCE’s revenue declined 70.3% year-over-year to $767 thousand in the third quarter that ended September 30, 2022. Its operating loss and net loss widened by 75.2% and 200.9% from the year-ago values to $145.56 million and $145.55 million, respectively.
The company’s net loss per share amounted to $0.55, widening 71.9% from the same quarter the prior year. Also, its adjusted EBITDA loss increased 89.8% year-over-year to $128.52 million for the same period.
Street expects SPCE’s revenue to be $666.67 thousand in the fiscal first quarter ending March 2023. Its EPS is expected to decline 47.2% to negative $0.53 for the same quarter. It failed to surpass the EPS estimates in three of the trailing four quarters.
Shares of SPCE have declined 25.8% over the past six months to close the last trading session at $5.52.
SPCE’s POWR Ratings reflect its poor prospects. The company has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
It has an F grade for Value, Stability, and Sentiment and a D for Growth and Quality. Within the same industry, it is ranked last.
Click here to see SPCE’s rating for Momentum.
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CPA shares were unchanged in premarket trading Wednesday. Year-to-date, CPA has gained 10.71%, versus a 6.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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