Despite the challenging macroeconomic environment, the airline industry is flourishing and is poised to maintain significant revenue growth, buoyed by pent-up travel demand and increased disposable income.
Given the backdrop, in this article, I have evaluated the fundamentals of three sound airline stocks, Allegiant Travel Company (ALGT), United Airlines Holdings, Inc. (UAL), Corporación América Airports S.A. (CAAP), which could be added to your watchlist now.
Before we delve into their fundamentals, let's take a closer look at how the airline industry has been performing thus far to gauge its prospects.
Willie Walsh, the Director General of the International Air Transport Association (IATA), revealed that the airline industry's financial performance in 2023 has exceeded expectations due to several positive factors, including the early recovery in China, robust cargo revenues, and some relief in jet fuel prices.
Moreover, IATA’s upgraded outlook for 2023 indicates a projected improvement in airline industry profitability. For instance, anticipated airline industry net profits for 2023 are set to reach $9.80 billion, with a net profit margin of 1.2%. This figure represents a significant increase from the previous forecast of $4.70 billion in December 2022, more than doubling the expected profitability for the year.
Additionally, in 2023, it is projected that approximately 4.35 billion individuals will engage in travel, approaching the 4.54 billion who traveled by air in 2019.
On top of it, total revenues are anticipated to experience a year-over-year growth of 9.7%, reaching a substantial $803 billion. This achievement is notable as it marks the industry's return to surpassing the $800 billion milestone, which has not been seen since 2019 when revenues reached $838 billion.
Moreover, apart from travel, air transportation remains critical for international trade. The airline is expected to grow at a CAGR of 25.5% between 2022 and 2027 due to increasing disposable income and a rapidly growing middle-class population.
Overall, the airline industry seems to be experiencing a remarkable resurgence, almost reaching its pre-pandemic levels, and will most likely remain in a bright post. Therefore, investors could watch and wait for a better entry point in ALGT, UAL, and CAAP.
To that end, let us now examine the fundamental aspects of the featured Airlines stocks, beginning with number three.
Stock #3: Allegiant Travel Company (ALGT)
ALGT is a leisure travel company that provides travel services and products to residents of underserved cities in the United States. The company offers scheduled air transportation on limited-frequency, nonstop flights between under-served cities and leisure destinations.
On July 11, ALGT introduced six fresh nonstop routes to sought-after winter vacation destinations, offering one-way fares as affordable as $40. These routes are set to commence in November, connecting various communities across the country with popular locations such as Nashville, Portland, Phoenix/Mesa, and various destinations in Florida.
This expansion strategy is designed to build on ALGT's previous achievements in the market.
ALGT’s trailing-12-month EBIT margin of 12.38% is 26.3% higher than the industry average of 9.80%. Its trailing-12-month CAPEX/Sales of 28.55% is 875.9% higher than the industry average of 2.93%. Furthermore, the stock’s trailing-12-month cash per share of $8.45 is 311.6% higher than the industry average of $2.05.
For the fiscal second quarter that ended June 30, 2023, ALGT’s total operating revenue increased 8.6% year-over-year to $683.81 million. Its operating income improved 410.6% from the year-ago value to $133.43 million. The company’s net income rose significantly year-over-year to $88.47 million. In addition, its EPS came in at $4.80, representing a significant increase from the prior-year quarter.
Analysts expect ALGT’s revenue for the fiscal third quarter (ending September 2023) to increase 4.4% year-over-year to $585.20 million, while its EPS for the ongoing quarter is expected to be $0.54. Its EPS is projected to improve by 85.6% per annum over the next five years.
Moreover, the company topped its revenue estimates in each of the trailing four quarters, which is impressive.
Additionally, ALGT’s revenue and EBIT have grown at CAGRs of 20.3% and 43.6% over the past three years, respectively. Likewise, its total assets have increased at a CAGR of 13.9% over the same period.
ALGT’s shares have gained 25.8% year-to-date to close the last trading session at $85.53.
ALGT’s POWR Ratings are consistent with this outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #18 out of 32 stocks in the Airlines industry. It has a C grade for Value, Momentum, Stability, Sentiment, and Quality. Click here to see ALGT’s Growth rating.
Stock #2: United Airlines Holdings, Inc. (UAL)
UAL, through its subsidiaries, provides air transportation services. The company transports people and cargo through its mainline and regional fleets. In addition, it also offers catering, ground handling, training, and maintenance services for third parties.
On July 25, UAL revealed its investment in Electric Power Systems, a company specializing in battery technology with versatile applications in the aerospace sector. Unlike traditional battery cell production, Electric Power Systems focuses on adaptable module technology that can enhance the performance and safety of various types of batteries.
This adaptability opens doors for UAL to explore Electric Power Systems' modules for immediate aerospace applications and for long-term initiatives aimed at supporting decarbonization. It's worth noting that this marks UAL’s second investment in electric battery technology, following its previous investment in Natron, a sodium-ion battery manufacturer.
In the same month, UAL further expanded its presence in the Asia-Pacific region by introducing additional routes, making it the first U.S. carrier to offer non-stop flights from the continental United States to Manila, along with additional direct flights to Hong Kong, Tokyo, and Taipei. These new routes are scheduled to commence in October.
The stock’s trailing-12-month ROCE of 45.69% is 234.9% higher than the industry average of 13.65%. Furthermore, UAL’s trailing-12-month cash per share of $29.29 is significantly higher than the industry average of $2.06.
For the fiscal second quarter, which ended on June 30, 2023, UAL’s total operating revenue increased 17.1% year-over-year to $14.18 billion. Also, its adjusted EBITDA rose 93.9% from the prior-year quarter to $3.08 billion. Moreover, the company’s net income amounted to $1.08 billion, up 226.7% year-over-year, while its EPS increased 224% from the year-ago value to $3.32.
Street expects UAL’s revenue and EPS for the third quarter (ending September 2023) to increase 11.8% and 35.8% year-over-year to $14.39 billion and $3.81, respectively. Moreover, the company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
UAL’s revenue has grown at CAGRs of 17.1% and 5.4% over the past three and five years, respectively. Also, its EBITDA has grown at a CAGR of 107.8% over the past three years.
The stock has gained 26.2% year-to-date to close the last trading session at $47.58.
UAL has an overall C grade, which translates to Neutral in our POWR Ratings system.
It also has a C grade for Growth, Momentum, and Quality. Within the same industry, it is ranked #15. Beyond what we stated above, we also have given UAL grades for Value, Stability, and Sentiment. Get all the UAL ratings here.
Stock #1: Corporación América Airports S.A. (CAAP)
Based in Luxembourg City, Luxembourg, CAAP, through its subsidiaries, acquires, develops, and operates airport concessions. It operates 53 airports in Latin America, Europe, and Eurasia.
The stock’s trailing-12-month EBIT margin of 25.58% is 140.5% higher than the industry average of 9.80%. Its trailing-12-month net income margin of 10.85% is 76% higher than the industry average of 6.16%. Furthermore, CAAP’s trailing-12-month levered FCF margin of 25.60% is 368.6% higher than the industry average of 5.46%.
For the fiscal second quarter, which ended on June 30, 2023, CAAP’s revenue increased 27.1% year-over-year to $422.70 million. Its operating income rose 43.1% year-over-year to $110.40 million. Also, its passenger traffic grew 30.5% from the year-ago value to 19.70 million.
In addition, during the same period, the company’s attributable net income and EPS amounted to $69.80 million and $0.43, respectively. While its adjusted EBITDA increased 36.4% from the prior-year quarter to $150.90 million.
The consensus revenue estimate of $1.46 billion for the fiscal year ending December 2023 represents a 5.9% increase year-over-year. The consensus EPS estimate of $1.09 for the same period indicates a 3.3% improvement year-over-year. Moreover, the company surpassed its revenue estimates in three of the trailing four quarters, which is promising.
CAAP’s revenue and EBIT have grown at CAGRs of 9.1% and 65.5% over the past three years, respectively. While its total assets and levered FCF have increased at CAGRs of 6.5% and 25.3% over the same period, respectively.
CAAP’s shares have gained 108.8% over the past year and 63.2% over the past six months to close the last trading session at $13.97.
CAAP has an overall rating of C, which translates to Neutral in our proprietary rating system.
It has a C grade for Growth, Value, Momentum, Stability, and Quality. Out of 32 stocks in the same industry, it is ranked #11. To see CAAP rating for Sentiment, click here.
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UAL shares were trading at $47.31 per share on Friday afternoon, down $0.37 (-0.78%). Year-to-date, UAL has gained 25.49%, versus a 17.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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