Airline stocks have been beaten up of late, but there are buying opportunities for studious growth investors.
Cheap oil led to a lot of excitement in the airline space. 2014 ended up being a great year.
But airlines have taken a bit of a timeout after an epic run, with many of the major players down 20% or more year-to-date.
Investors were spooked last month by comments made by top management of some major airlines – including Southwest Airlines (NYSE: LUV), which announced increased growth plans on May 20. The fear among investors was that irrational pricing could become the norm again if airlines get more competitive with pricing structures. But going down that path would be detrimental to all industry players. Cooler heads should prevail.
Hence, a more rationalized industry will keep these high-fliers making money. The benefits of reduced capacity – i.e., fuller planes – can’t be overstated, as it also allows airlines to charge higher fares.
If you want the best dividend payer in the airline industry, Delta Air Lines (NYSE: DAL) is your best bet. But for airline growth stocks, there are other plays. For investors that are less concerned with buybacks and dividends, here are two airlines well-situated for growth:
No. 1 Airline Growth Stock: JetBlue Airways (NASDAQ: JBLU)
JetBlue has really been the standout in the airline industry, with its shares up 25% year-to-date. All this comes as the airline has been executing on expanding its route network and boosting ancillary revenues. This includes rolling out an entire new class called Mint, which includes seats that lie flat.
However, there’s more upside to be had. The airline upped its fares during the first quarter and is expanding to new locations that should drive core revenues. New locations include Latin America and the Caribbean. Ancillary revenue opportunities include its “Even More” program, allowing fliers to buy privileges like early boarding and extra space.
Even with these opportunities for additional revenue growth and its superior stock price, JetBlue still trades on the cheap side. It has a forward price-earnings ratio of 10 based on next year’s earnings estimates.
No. 2 Airline Growth Stock: Southwest Airlines (NYSE: LUV)
Southwest has the longest-running dividend in the industry, but its yield is a mere 0.65%. Shares are off 13% year-to-date as investors are worried that the company is getting reckless with its expansion plans. Yet their expansion won’t really be bad news for Southwest, but could be bad news for the bigger players.
Southwest has already made a splash by buying up terminal slots in Washington, D.C. (Reagan National Airport) and New York (LaGuardia Airport). And despite Southwest’s aggressive expansion, it has no plans of getting into a low-fare war. In fact, it’s actually looking to raise fees over the near term.
Southwest still has some tailwinds from shifting to larger planes that carry more passengers for longer routes and are more fuel-efficient. It also has a top-notch balance sheet, and being a U.S.-focused airline, it doesn’t have to deal with currency headwinds.
Granted, Southwest does plan on breaking into the international market soon. And we’re finally seeing some benefits to its 2011 AirTran purchase. Last year, cost synergies were over $500 million, topping its initial synergy goal by 25%.
In the end, the airlines space is getting a bit more competitive, with regional players like Southwest trying to go more global. However, the fact remains that there are still fewer players in the industry today than just a decade ago. Plus, the expansion of Southwest and JetBlue might not be a positive for the “big boys,” but it does mean these two have growth catalysts in the interim.
The Next Tremendous Growth Industry
Speaking of growth markets, there’s one taking off right now that no investor can afford to ignore. Why? Well, research and consulting firm McKinsey believes this market will grow as much as 14,000% larger by 2025. That’s no joke. What’s more, it’s being led by what could be the biggest technological achievement of all time. If you’re a serious growth investor, this is one story you absolutely do not want to miss out on. Tyler Laundon has all the details for you right here.