A Value Opportunity Arises in Airline Stocks

Since that merger was completed in early December, airline stocks have reached new annual highs, and they probably would have gone higher on Monday if not for the effect of the very cold weather on flights and schedules. Given all that good news, we would not expect any value opportunity in the sector, but perhaps our expectations are misplaced.

United Continental Holdings Inc. (NYSE: UAL) closed at $39.36 on Monday night after posting a new 52-week high of $40.50. The annual low is $23.62. The consensus price target for the stock is $40.80, so we can fairly say that it is fully valued. Fiscal 2014 earnings per share (EPS) are forecast at $3.98, and the forward price-to-earnings (P/E) ratio is about 10. United’s stock is up more the 50% in the past 12 months.

American Airlines Group Inc. (NYSE: AAL) put up a post-merger high of $27.20 on Monday before closing at $27.03. The 52-week low is $12.70. Shares have gained more than $3.00 since the merger between American and U.S. Airways was completed. The consensus price target for the stock is about $32.40, giving a potential upside of about 20%. The EPS estimate for 2014 is $3.45, and the forward P/E ratio is just 7.74. For what it’s worth, the price-to-book ratio is negative.

Southwest Airlines Co. (NYSE: LUV) has seen its stock price rise by about 75% in the past 12 months, and like United, the stock posted a new 52-week high of $19.63 on Monday, before closing at $19.15. The low is $10.94. A consensus price target of around $20.10 yields a potential upside of 5%. The 2014 EPS estimate is $1.26, and the forward P/E ratio is 15.41.

Delta Air Lines Inc. (NYSE: DAL) also posted a new 52-week high Monday, before closing at $29.29. The new 52-week range is $12.87 to $29.80, and the stock price is up more than 125% in the past 12 months. The consensus price target on the stock is around $34.30, for an upside potential of 17%. EPS in 2014 is estimated at $2.61, and the stock’s forward multiple is 10.91.

JetBlue Airways Corp. (NASDAQ: JBLU) took a hit to its share price on Monday after cancelling flights due to the cold weather in New York and Boston. The stock posted an intra-day high of $9.18, at the top of its 52-week range of $5.70 to $9.20, before tanking to close at $8.66 after the flight cancellations. Shares have gained about 45% in the past year. With a price target of around $8.70, JetBlue’s stock is fully valued. EPS is expected to be $0.67 this year, and the company’s forward multiple is about 13.5.

Even though both Delta and American offer significant upside potential, American gets our nod because it is just beginning to reap the benefits of the recent merger. Delta has achieved a lot in the past year, cutting its labor force, negotiating new contracts and cutting its debt. It could be difficult for the company to repeat that performance in 2014.