There's always a dip somewhere in the world that investors with a lot of dry powder (cash buying power) patiently wait to deploy their assets into good deals. Who would have thought that the most recent set of opportunities would be found in the airline stocks space today?
Plenty of factors caused the group to fall to its recent lows. Still, as every coin has two sides, several forces are also at play, strengthening the bullish case for a coming sector turnaround. Considering that airlines depend on two factors, Consumer travel, and business activity, it would be wise to keep an eye on where the cycle is headed.
Today, it is stocks like Southwest Airlines (NYSE: LUV), United Airlines (NASDAQ: UAL), and even Boeing (NYSE: BA) that bring you the best potential buying opportunities in the space. The sweetener in this deal is that Wall Street stands behind the thesis, and even the FED sponsors the comeback this time, but more on that later.
Scanners up
In case you haven't heard, here is some valuable insight to get you up to speed. Analysts at The Goldman Sachs Group (NYSE: GS) recently rolled out their house view in two important reports. One focuses on their broader expectations for the macro environment this 2024, the other zooming into the possible ranges where oil may trade this year.
First things first, you should know that these two views are interconnected. Suppose the economy experiences a rise in activity and demand. In that case, this will automatically have a bullish effect on the price of oil.
Since high oil prices are bearish for airlines, you may be reassured by the fact that management is preparing for the rising costs. In their latest quarterly earnings press release, Southwest management rolled out their outlooks regarding fuel costs.
In those views, the cost per gallon rose to $2.85 to $2.95 from a lower range of $2.70 to $2.80 a year prior. Hedging expenses are also rising for the updated outlooks, meaning that - just like Goldman - Southwest management has an optimistic view on oil prices.
The market is a popularity contest regarding short-term price fluctuations, and these stocks have not been popular at all. What started with an incident with Boeing's 737 MAX 9 airplane in an Alaska Air (NYSE: ALK) flight spread into a sector-wide sell-off; this sent United lower by 15.3% in one week, yet Southwest stood its ground, it seems.
Based on your risk appetite, there are three views you can take with this 'special situation' to take advantage of what is going on according to what your portfolio needs. Here it goes:
Pick and choose
Because Goldman mentioned an expected manufacturing sector breakout, this new activity could hit Boeing first. You can read this piece on how that company's earnings will likely not be affected by the faulty MAX 9 since most of their new orders (to be reported this month) only include MAX 8 and MAX 10 models.
Now, there must be a reason why markets willingly pay a premium for Boeing compared to the rest of the industry. A forward price-to-earnings ratio of 56.4x will place this stock at a 166.0% premium to the sector's 21.2x average valuation. As they say, "it must be expensive for a reason".
In this same sense, markets are punishing United Airlines because of its exposure to the faulty MAX 9 jets. If you believe this issue will remain forever, stay away from it, but if your logic argues otherwise, you may face up to a 73.9% upside based on analyst price targets.
So, look, you can use a 5.8x forward P/E ratio to benchmark the airline group's current valuation. United offers you a 31.0% discount with its 4.0x multiple. The opposite applies to "it must be cheap for a reason." But now you know why: a decision will come down to your faith in the MAX 9.
Far from a deep value play like United, Southwest offers less risk by betting along the consensus. Like Boeing, this stock trades at a premium to its peers, at 182.0% above this time. A 16.2x forward P/E comes justified after analysts rolled out their projected EPS growth of 22.1%, also above the peer group.
There you have it. Boeing and United share the same virus, but if you believe the cure is right around the corner, these could be excellent ways to profit by betting against the consensus. If your risk appetite is lower after a tumultuous 2023, Southwest could be the safe haven to get into airlines.
