Transportation

Terror Attacks Weigh Heavily on Airlines: 3 to Buy Now

courtesy of Southwest Airlines Co.

Every time here is a huge geopolitical headline issue, especially one as horrific as the deadly attacks in Paris, the transportation sector gets hit, and usually airlines are among the hardest hit. Toss is the downing of a Russian airlines flight from the Middle East, which now appears to also be the work of terrorists, and the sector really takes it on the chin.

However, the reality is, despite all that, the airline industry is having one of the best years ever. With jet fuel pricing still at record lows, the top and bottom lines for the leading companies should be outstanding for the fourth quarter and 2016. We screened the Merrill Lynch research data base for airline stocks rated Buy and found three that could provide investors outstanding upside potential.

Delta Air Lines

This company consistently has ranked high with Wall Street. Delta Air Lines Inc. (NYSE: DAL) and the regional Delta Connection carriers offer service to 334 destinations in 64 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. Wall Street analysts have long lauded that Delta has the most extensive hedging policy among the airlines and owns and operates a refinery in addition to a sizable hedging book. Trading at a low 8.8 times 2016 estimated earnings, the stock is right in the metrics that look so solid.

China Eastern Airlines and Delta signed an agreement earlier this year to expand their partnership and better connect Delta’s global network with China Eastern, one of the leading airlines in China. The agreement will include a $450 million investment by Delta to acquire a 3.55% stake in China Eastern.

Delta investors are paid a 1.23% dividend. The Merrill Lynch price target for the stock is $60. The Thomson/First Call consensus price objective is $61.43. The stock closed most recently at $47.75.

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JetBlue Airways

This stock is a top mid cap pick in the domestic airlines. JetBlue Airways Corp. (NASDAQ: JBLU) has a higher short interest percentage than some of its peers at over 8% of the free float, while that has dropped from near 17% in the spring, short-sellers have to be getting more concerned. JetBlue has added high dollar premium seating to long-haul flights, including New York to Los Angeles and San Francisco routes last year. Importantly, the company trade at a low 0.27 price-to-earnings growth number, implying good corporate growth ahead.

The company posted a very strong 8% year-over-year growth in its revenues. Passenger revenues grew by 9% year over year, driven by solid capacity growth and higher PRASM (or passenger revenue per available seat mile) during the most recent quarter. JetBlue also benefited slightly from a 25% year-over-year decrease in fuel prices, which based on the Brent crude price drop since earnings were reported should be a strong tailwind for the rest of 2015 and next year

The Merrill Lynch price target is $29, and the consensus target is $29.29. The stock close Wednesday at $25.47.

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Southwest Airlines

This company continues to expand routes and remains a low-cost leader. It is also the top pick across Wall Street. Southwest Airlines Inc. (NYSE: LUV) continues to increase the footprint and brand awareness all over the country. With the domestic market showing reasonably good strength, and the pricing environment looking very solid for the rest of 2015 and through next year, revenues should stay strong and continue to grow. Jet fuel prices, which still remain much lower than in past years, is almost 30% of Southwest’s total costs, have been a key for improving revenues and earnings. With almost no international business at this time, currency headwinds are not an issue for the airline

CEO Gary Kelly said when interviewed earlier this year, “Our available seat-mile growth will be a little bit more than our seat growth, but it will be around 7 percent for this year; and likewise we will manage aggressively to the low end of that range for next year. Much of the growth in 2016 is simply carryover from 2015.” This has been a concern for some investors and probably relieves some anxiety of overcapacity.

Southwest shareholders are paid a 0.65% dividend. The Merrill Lynch price target is $56, and the consensus target is lower at $53.54. The stock closed Wednesday at $46.31.

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A focus on Southwest and JetBlue is emphasized as they have zero international business to speak of, so currency headwinds are much less of an issue. Also, the fact that they are running domestic routes leaves what would seem to be far less of a chance for any sort of explosive device to find a way on board.

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