Are Clear Skies Ahead? Grading Airline Stocks Using A+ Investor
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three airline stocks. Despite the latest airline incidents, air traffic is expected to reach record levels for revenues and passengers in 2024. Should you consider the airline stocks of American Airlines Group Inc. (AAL), Delta Air Lines Inc. (DAL) and Southwest Airlines Co. (LUV)?
Airline Stocks Recent News
The airline industry has certainly faced its share of turbulence in the past few years, navigating the stormy skies of the pandemic, which dramatically reduced air travel. A snapshot from this period shows a steep decline in passenger traffic, with U.S. airline numbers plummeting by 96% in April 2020 compared to April 2019, according to a McKinsey & Co. report. In 2020, a significant 55% drop in revenues for airlines worldwide set the industry back by about 16 years. As such, it may be time for investors to consider these negative shocks as possible opportunities.
Operations and planning for the U.S. Transportation Security Administration (TSA) are currently focused on addressing increasing passenger volumes, which are expected to eventually surpass the pre-pandemic average of up to 2.3 million passengers per day.
On a global scale, the Airports Council International (ACI) World has forecast that 2024 will be a milestone year for the recovery of global passenger traffic, with an expectation to reach 9.4 billion passengers, surpassing the 2019 level of 9.2 billion passengers. This recovery signifies a notable rebound in post-pandemic air travel demand, with the Latin America-Caribbean region expected to be the first to surpass its 2019 passenger volume level.
Grading Airline Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three airline stocks — American Airlines, Delta Air Lines and Southwest Airlines — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Airline Stocks
What the A+ Stock Grades Reveal
American Airlines Group Inc. (AAL) is a holding company. Its primary business activity is the operation of a network air carrier. The company, together with its regional airline subsidiaries and third-party regional carriers, operates under the American Eagle brand, providing scheduled air transportation for passengers and cargo through its hubs in Charlotte, Chicago, Dallas-Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C., and partner gateways, including London, Doha, Madrid, Seattle-Tacoma, Sydney and Tokyo. Its subsidiaries include American Airlines Inc., Envoy Air Inc., PSA Airlines Inc. and Piedmont Airlines Inc. Its cargo division provides a range of freight and mail services, with facilities and interline connections available across the globe. It operates 925 mainline aircraft supported by its regional airline subsidiaries and third-party regional carriers, which together operate an additional 536 regional aircraft.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. American Airlines has an Earnings Estimate Revisions Grade of C, based on a score of 50, which is neutral. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
American Airlines reported a positive earnings surprise for fourth-quarter 2023 of 181.6%, and in the prior quarter reported a positive earnings surprise of 50.8%. Over the last month, the consensus earnings estimate for the first quarter of 2024 has decreased from –$0.222 to –$0.240 per share due to two upward and five downward revisions.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
American Airlines has a Quality Grade of B, with a score of 65, which is strong. The company ranks strongly in terms of its change in total liabilities to assets and gross income to assets. American Airlines has a change in total liabilities to assets of –3.6% and a gross-income-to-assets ratio of 52.3%. The company also ranks highly in terms of its F-Score of 6. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company.
American Airlines has a Momentum Grade of C, with a score of 41, which is average. This score is derived from average relative price strengths of –9.1% in the most recent quarter, –6.1% in the second-most-recent quarter and –3.9% in the fourth-most-recent quarter, offset by a lower relative price strength of –14.7% in the third-most-recent quarter. The ranks are 48, 48, 35 and 67, sequentially from the most recent quarter. Its weighted four-quarter relative price strength is –8.6%. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%.
American Airlines also has a Value Grade of A, based on its Value Score of 86, which is deep value. The company does not currently pay any regular dividends.
Delta Air Lines Inc. (DAL) provides scheduled air transportation for passengers and cargo throughout the U.S. and around the world. The company has hubs and markets in Amsterdam, Atlanta, Bogota, Boston, Detroit, Lima, London-Heathrow, Los Angeles, Mexico City, Minneapolis-St. Paul, New York-JFK and LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Santiago (Chile), Sao Paulo, Seattle, Seoul-Incheon and Tokyo. Its segments include airline and refinery. Its airline segment is managed as a single business unit that provides scheduled air transportation for passengers and cargo throughout the U.S. and around the world and includes its loyalty program, as well as other ancillary businesses. Its refinery segment operates for the benefit of the airline segment by providing jet fuel to the airline segment from its own production and through jet fuel obtained through agreements with third parties. The refinery segment’s production consists of jet fuel, as well as non-jet fuel products.
The company has a Value Grade of A, based on its Value Score of 88, which is deep value. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free cash flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA).
Delta Air Lines’ Value Score is based on several traditional valuation metrics. The company has a rank of 18 for the price-to-sales ratio, 39 for shareholder yield and 63 for the price-to-book ratio. The company has a price-to-sales ratio of 0.47, a shareholder yield of 0.8% and a price-to-book ratio of 2.46. Lower price-to-sales and price-to-book ratios are considered better. Delta Air Lines’ price-to-sales ratio is well below the sector median of 1.37, and its price-to-book ratio is slightly higher than the sector median of 2.30.
Delta Air Lines has a Quality Grade of B, with a score of 76, which is strong. The company has a buyback yield rank of 57. The buyback yield represents the repurchase of outstanding shares divided by a stock’s existing market capitalization. It has a –0.2% buyback yield, which is above the sector median. It has a strong gross-income-to-assets ratio, with a rank of 77. Its F-Score of 7 is above the sector median of 5.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. Delta Air Lines has a Growth Grade of A, based on its Growth Score of 88, which is very strong. This is based on sales increases and positive cash from operations in four out of the past five years. The company has a Momentum Grade of B, with a score of 61, which is strong. The company currently pays an indicated annual dividend of $0.40 per share, translating to a forward yield of 0.9%.
Southwest Airlines Co. (LUV) is the largest domestic aircraft carrier in the U.S., as measured by the number of originating passengers boarded. Southwest Airlines operates over 700 aircraft in an all-Boeing 737 fleet. Despite expanding into longer routes and business travel, the airline still specializes in short-haul leisure flights using a point-to-point network. The company offers ancillary services, such as EarlyBird Check-In, upgraded boarding and transportation of pets and unaccompanied minors, in accordance with its respective policies. It has 121 destinations in 42 states, Washington, D.C., Puerto Rico and 10 international countries nearby, such as Mexico, Jamaica, the Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands and Turks and Caicos, with more being added consistently. Southwest Airlines operates a low-cost carrier business model.
Southwest Airlines has a Growth Grade of B, based on a score of 72, which is strong. The company reported fourth-quarter 2023 revenues of $6.8 billion, up 10.5% from $6.2 billion in the prior-year quarter. The company reported a quarterly diluted loss of $0.37 per share, unchanged from the prior-year quarter.
Southwest Airlines has a Momentum Grade of D, based on its Momentum Score of 38, which is weak. This means that it ranks in the second-lowest tier of all stocks in terms of its weighted relative price strength over the last four quarters. This score is derived from low relative price strengths of –12.4%, –3.2%, –9.8% and –9.8% in the most recent, second-most-recent, third-most-recent and fourth-most-recent quarters, respectively. The ranks are 40, 55, 44 and 52, sequentially from the most recent quarter. The weighted four-quarter relative price strength is –9.5%, which translates to a rank of 38.
The company has a Quality Grade of B, with a score of 70, which is strong. It has an F-Score of 7, which is above the sector median of 5. It also has strong gross income to assets, with a rank of 85. The company currently pays an indicated annual dividend of $0.72 per share, translating to a forward yield of 2.5%.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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