Despite a challenging macroeconomic environment, the airline industry thrives due to the travel demand revival. Airliners are achieving strong growth in their topline as demand surpasses pre-Covid levels. The comeback of international travel may challenge domestic-focused airlines, but overall, airliners expect expanding profit margins thanks to sustained robust travel demand.
Amid this backdrop, buying fundamentally strong airline stocks Deutsche Lufthansa AG (DLAKY) and Air Canada (ACDVF) could be wise. However, Virgin Galactic Holdings, Inc. (SPCE) might be best avoided due to its weak fundamentals.
Before diving deeper into their fundamentals, let’s discuss what’s happening in the airline industry.
After witnessing a lull during the pandemic, the airline industry has rebounded strongly thanks to the pent-up demand for travel and the easing of travel restrictions globally. Airliners are expected to see their top and bottom lines soar due to increased travel demand and moderating jet fuel prices.
Airlines for America predicts a record 256.80 million passengers flying from June to August, up 1% from 2019. IATA’s Director General Willie Walsh said, “Airline financial performance in 2023 is beating expectations. Stronger profitability is supported by several positive developments. China lifted COVID-19 restrictions earlier in the year than anticipated.”
“Cargo revenues remain above pre-pandemic levels even though volumes have not. And, on the cost side, there is some relief. Jet fuel prices, although still high, have moderated over the first half of the year,” he added. The airline industry's net profits are expected to reach $9.8 billion this year, surpassing the previous forecast of $4.7 billion.
Let’s take a closer look at the fundamentals of the featured stocks.
Stocks to Buy:
Deutsche Lufthansa AG (DLAKY)
Headquartered in Cologne, Germany, DLAKY operates as an aviation company in Germany and internationally. The company's Network Airlines segment offers passenger services. Its Eurowings segment provides passenger services through a route network of over 100 destinations in over 50 countries.
On May 25, 2023, DLAKY announced it would acquire a 41% stake in ITA Airways for €325m, with the potential to buy the rest later. This deal aims to improve competition in Italy's aviation market and boost connections to international destinations. Pending approval, the partnership will benefit both companies and enhance Lufthansa Group's growth opportunities.
In terms of forward Price/Sales, DLAKY’s 0.30x is 78.9% lower than the 1.41x industry average. Its 3.54x forward EV/EBITDA is 68.5% lower than the 11.25x industry average. Likewise, its 6.77x forward EV/EBIT is 57% lower than the 15.74x industry average.
DLAKY’s total revenues for the fiscal first quarter ended March 31, 2023, increased 40.3% year-over-year to €7.02 billion ($7.73 billion). Its adjusted EBITDA came in at €272 million ($299.6 million), compared to an adjusted EBITDA loss of €32 million ($35.2 million) in the year-ago quarter.
Analysts expect DLAKY’s EPS revenue for the quarter that ended June 30, 2023, to increase 22.5% year-over-year to $10.55 billion. Its EPS for the quarter ending September 30, 2023, is expected to increase 46.6% year-over-year to $1. Over the past year, the stock has gained 63.3% to close the last trading session at $10.06.
DLAKY’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Value, and Momentum. It is ranked #6 out of 28 stocks in the A-rated Airlines industry. To see DLAKY’s Stability, Sentiment, and Quality ratings, click here.
Air Canada (ACDVF)
Headquartered in Saint-Laurent, Canada, ACDVF provides domestic, U.S. transborder, and international airline services. The company provides scheduled passenger services under the Air Canada Vacations and Air Canada Rouge brand names in the Canadian market, the Canada-U.S. transborder market, and the international market to and from Canada.
In terms of forward non-GAAP P/E, ACDVF’s 9.87x is 45.1% lower than the 17.96x industry average. Its 4.37x forward EV/EBITDA is 61.2% lower than the 11.25x industry average. Likewise, its 8.27x forward EV/EBIT is 47.5% lower than the 15.74x industry average.
For the first quarter ended March 31, 2023, ACDVF’s total operating revenues increased 89.9% year-over-year to C$4.89 billion ($3.70 billion). Its adjusted net loss narrowed 74.8% year-over-year to C$188 million ($142.29 million). Its adjusted EBITDA came in at C$411 million ($311.08 million), compared to an adjusted EBITDA loss of C$143 million ($108.23 million) in the prior-year quarter.
Additionally, its net cash flows from operating activities rose 291.6% year-over-year to C$1.44 billion ($1.09 billion).
Street expects ACDVF’s revenue for the quarter ended June 30, 2023, to increase 26.2% year-over-year to $3.90 billion. Its EPS for the quarter ending September 30, 2023, is expected to increase 68.9% year-over-year to $1.54. Over the past year, the stock has gained 36.2% to close the last trading session at $18.50.
ACDVF’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #5 in the same industry. It has an A grade for Growth and a B for Momentum and Quality. Click here to see the other ratings of ACDVF for Value, Stability, and Sentiment.
Stock to Avoid:
Virgin Galactic Holdings, Inc. (SPCE)
Headquartered in Las Cruces, New Mexico, SPCE focuses on developing, manufacturing, and operating spaceships and related technologies for conducting commercial human spaceflight and flying commercial research and development payloads into space.
In terms of forward EV/Sales, SPCE’s 92.54x is significantly higher than the 1.82x industry average. Likewise, its 131.27x forward Price/Sales is considerably higher than the 1.41x industry average.
SPCE’s operating loss for the first quarter ended March 31, 2023, widened 78.8% year-over-year to $163.41 million. Its net loss widened 71.3% year-over-year to $159.39 million. Additionally, its net loss per share widened 58.3% year-over-year to $0.57. Also, its adjusted EBITDA loss widened 82% year-over-year to $139.83 million.
For the quarter ended June 30, 2023, SPCE’s EPS is expected to remain negative. It failed to surpass the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has declined 42.5% to close the last trading session at $4.28.
SPCE’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of F, translating to a Strong Sell in our proprietary rating system.
It has an F grade for Stability and Sentiment and a D for Value. It is ranked last in the Airlines industry. For additional ratings of SPCE for Growth, Momentum, and Quality, click here.
What To Do Next?
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DLAKY shares were trading at $9.90 per share on Tuesday morning, down $0.16 (-1.59%). Year-to-date, DLAKY has gained 20.22%, versus a 20.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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