Grading Three Airline Stocks That Are Ready to Fly
See how airline companies American Airlines, Delta Air Lines and United Airlines grade on certain key criteria that you need to consider in order to capitalize on the industry’s improvement as people become more comfortable traveling again.
Three Airline Stocks That Could Really Take Off
Airlines were some of the companies most adversely affected by the coronavirus pandemic. The news flow from the travel industry is getting better and better … or at least less bad. On April 5, 2021, Sabre Corp. (SABR), one of the travel industry’s largest global distributions systems (i.e., booking services), announced that its gross air travel and hotel bookings for March had improved from January and February levels.
While bookings are still well below where they were one year ago, they are improving and are better than they have been since the coronavirus pandemic struck. The travel industry recovery is strengthening.
In raw numbers, Sabre’s gross air travel booking for March were “only” 70% below the levels of March 2020. But that number was an improvement over the 81% drop in January and 77% in February.
The latest stimulus package, the acceleration of vaccine distribution and rising vaccination rates are helping to improve airline company prospects.
The latest stimulus bill provides $1,400 to many American consumers who may decide to spend some of that money getting on a plane to visit family, friends or a new destination.
After a slow start, vaccine distribution and administration are accelerating. Since the coronavirus vaccine distribution began in December 2020, over 167 million doses have been administered to people in the U.S., according to the Centers for Disease Control and Prevention (CDC). As of April 5, 2021, more than 107.5 million Americans — about 32.4% of the total population — have received at least one dose of the vaccine.
The Transportation Security Administration (TSA) announced last week that U.S. air passenger traffic was up 3.9% from the week prior and averaged 1.4 million over the last seven days. This is up over 700% from last year but is still 40% below the 2.3 million average from 2019. Travel prices are also starting to rise as air travel rebounds.
Last Friday, the CDC said fully vaccinated people can safely travel at “low risk.” The announcement lifting the agency’s guidance that all Americans should avoid non-essential travel should assist the U.S. travel industry, which has struggled since the coronavirus pandemic began in early 2020. The CDC did not revise guidance for non-vaccinated people.
The airline industry is starting to see some tailwinds, but it may take time for travelers to get back to their pre-pandemic routines. Travel bookings suggest people will be more comfortable traveling by summertime. Is it time for the airline recovery to really start to take off?
Certainly, the travel recovery trend faces ongoing headwinds, and setbacks are possible. One thing to watch is how business travel will return now that companies have adjusted to working remotely and conducting meetings online. If business travel doesn’t bounce back, that would be a negative for airlines, as business travel is more of a high-margin business than leisure travel. But the risk-reward profile for many travel stocks appears to be shifting in favor of reward. It seems clear that there’s plenty of pent-up demand for leisure travel — we could all use a vacation after a difficult, isolating year.
American Airlines Group Inc. (AAL) is a holding company. It is the world’s largest airline by scheduled revenue passenger miles. The company’s primary business activity is the operation of a network air carrier, providing scheduled air transportation for passengers and cargo. The company’s cargo division provides a range of freight and mail services, with facilities and interline connections available across the globe. Together with its regional airline subsidiaries and third-party regional carriers operating as American Eagle, the airline operated an average of nearly 6,800 flights per day to more than 365 destinations across 61 countries prior to the pandemic, principally from its major hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. After completing a major fleet renewal, the company has the youngest fleet of U.S. legacy carriers.
Delta Air Lines Inc. (DAL) is one of the world’s largest airlines, with a network of over 300 destinations in more than 50 countries. It is the third-largest U.S. airline in terms of seat-mile capacity flown annually. Delta operates a hub-and-spoke system network, where it gathers and distributes passengers across the globe through key locations in Atlanta, New York, Salt Lake City, Detroit, Seattle and Minneapolis-St. Paul. Delta’s sale of frequent flier miles, particularly to American Express, is a major driver of the firm’s profits.
United Airlines Holdings Inc. (UAL), formerly United Continental Holdings Inc., is a holding company and its principal, wholly owned subsidiary is United Airlines Inc. (United). It is the world’s third-largest airline by scheduled revenue passenger miles. United is the second-largest U.S. airline in terms of annual seat-miles flown. The company transports people and cargo throughout North America and to destinations in Asia, Europe, the Middle East and Latin America. United’s hubs include San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark and Washington, D.C. United operates a hub-and-spoke system that is more focused on international travel than legacy peers. It also has contractual relationships with various regional carriers to provide regional aircraft service, branded as United Express.
AAII’s A+ Stock Grade Summary for Three Airline Stocks Ready for Takeoff
As of April 5, 2021, American Airlines had a $15.3 billion market capitalization. American Airlines’ stock is up 52.1% in 2021, up 5.9% in the previous five trading days and up over 150% in the past year. The company reported its fiscal fourth-quarter earnings at the end of January. Currently, American Airlines’ price-earnings ratio is not applicable due to negative earnings. The company’s trailing 12-month revenue is $17.3 billion with a negative 51.2% net profit margin. Year-over-year quarterly sales growth most recently was down 64.4%. Analysts expect adjusted earnings to increase from negative $7.64 per share for the fiscal year ending December 2021 to positive $0.26 per share in 2022.
Delta Air Lines’ stock is up 23.0% in 2021, up 3.9% in the previous five trading days and up over 122.0% in the past year. The company reported its fiscal fourth-quarter earnings in mid-January. Currently, Delta’s price-earnings ratio is not applicable due to negative earnings. The company’s trailing 12-month revenue is $3.97 billion, with a negative 72.4% net profit margin. Year-over-year quarterly sales growth most recently was down 65.3%. Analysts expect adjusted earnings to increase from negative $2.51 per share for the fiscal year ending December 2021 to positive $2.51 in 2022.
United Airlines’ stock is up 33.6% in 2021, up 4.5% over the previous five trading days and up 148.3% in the past year. Currently, United’s price-earnings ratio is not applicable due to negative earnings. The company’s trailing 12-month revenue is $15.4 billion with a negative 46.0% net profit margin. Year-over-year quarterly sales growth most recently was down 68.7%. Analysts expect adjusted earnings to increase from negative $9.87 per share for the fiscal year ending December 2021 to positive $2.71 per share next year.
Grading American Airlines, Delta Air Lines and United Airlines Stock
Stock evaluation requires access to huge amounts of data and the knowledge and time to sift through it all, making sense of financial ratios, reading income statements and analyzing recent stock movements. To help individual investors with that daunting task, AAII created A+ Investor, a robust data suite that condenses data research in an actionable and customizable way suitable for investors of all knowledge levels.
AAII’s proprietary stock grades come with A+ Investor. These offer intuitive A–F grades for each of five key investing factors: value, growth, momentum, earnings revisions and quality. Here, we’ll take a closer look at American Airlines, Delta Air Lines and United Airlines stock grades for growth, momentum and earnings estimate revisions.
American Airlines, Delta Air Lines and United Airlines Growth Grades
Growth investing builds on the idea that stocks of companies exhibiting strong, consistent and prolonged growth outperform those of slower-growth companies. AAII measures several dimensions of growth, including year-over-year increases in sales and earnings, long(er)-term historical sales and earnings growth rates, as well as analyst-forecasted long-term earnings growth.
The components consider a company’s success in growing its sales, earnings per share and operating cash on a year-over-year basis for the latest reported fiscal quarter and on an annualized basis over the last five years. High rates, especially compared to the sector median, lead to better scores.
American Airlines has a Growth Score of 7, which is very weak. Meanwhile, Delta Air Lines has a Growth Score of 9, which is very weak and United Airlines has a Growth Score of 8, which is also very weak.
American Airlines, Delta Air Lines and United Airlines Momentum Grades
Momentum grades help uncover stocks experiencing anomalously high rates of return; research finds that stocks with high relative levels of momentum tend to outperform, whereas those with low levels of momentum tend to continue underperforming. Momentum is based on the price change of a stock over a specified period relative to all other stocks.
American Airlines has a Momentum Score of 86, which is very strong. Meanwhile, Delta Air Lines has a Momentum Score of 78, which is strong.
United Airlines has a Momentum Score of 79, which is strong. This means it ranks near the top of the pack of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters. The most recent quarterly price change is given a weight of 40% and each of the three previous quarters are given a weighting of 20%.
American Airlines, Delta Air Lines and United Airlines Earnings Estimate Revisions Grades
Earnings estimate revision scores take into account the magnitude of a company’s earnings surprise in its last two reported fiscal quarters. Often, positive surprises beget further positive surprises — or at least continued sales growth (the exact opposite is generally true, too).
Estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. Earnings estimate revisions are based on the statistical significance of a firm’s last 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 has an Earnings Estimate Revisions Score of 47, which is neutral. Meanwhile, Delta Air Lines has an Earnings Estimate Revisions Score of 33, which is negative and United Airlines has a score of 28, which is negative.
Other American Airlines, Delta Air Lines and United Airlines Grades
In addition to growth, momentum and earnings estimate revisions, A+ Investor also provides grades for value and quality. Successful stock investing involves buying low and selling high, so valuation is an important consideration for stock selection. Buying stocks that are going to go up typically means buying stocks that are undervalued in the first place, although momentum investors may argue that point.
AAII’s A+ Investor value grade derives from a stock’s value score. The value score is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio. The score is variable, meaning it can consider all six ratios or, should any of the six ratios not be valid, the remaining ratios that are valid. To be assigned a value score, stocks must have a valid (non-null) ratio and corresponding ranking for at least two of the six valuation ratios.
Stocks with a value score from 0 to 20 are considered deep value, those with a score between 21 and 40 are a good value and so on.
Like the value grade, AAII’s A+ Investor quality grade comes from the percentile rank of key metrics. Specifically, the quality grade is the percentile rank of the average of the percentile ranks of the return on assets (ROA), return on invested capital (ROIC), gross profit relative to assets, buyback yield, change in total liabilities to assets, accruals, 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 remaining measures that are valid. To be assigned a quality score, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The quality score is used to assess the underlying “quality” of a particular stock. A higher quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period of 1998 through 2019.
Stocks receive better grades (higher scores) for having higher scores for the quality sub-components and worse grades (lower scores) for lower scores for the sub-components.
One of the most popular techniques to search for both value and growth centers around stocks with low price-earnings ratios relative to their earnings growth rates. The price-earnings-to-growth ratio — popularly known as the PEG ratio — is computed by dividing the price-earnings ratio by the earnings per share growth rate.
One of AAII’s stock screens that uses PEG ratios and price strength to find growth stocks trading at a reasonable price is AAII’s Value on the Move PEG With Estimated Growth Screen. This screen has a 14.8% theoretical annual return since inception.
Combining value with price and earnings momentum screens should help to identify reasonably priced stocks that are on the move. However, keep in mind that the purpose of this screen is to illustrate, with real firms, a potentially useful combination of value and momentum analysis.
These two key factors, when combined with the above, provide a holistic view into a particular stock. Further, A+ Investors can see whether American Airlines, Delta Air Lines or United Airlines stock passes any of our 60+ stock screens that have outperformed the market since their creation.
American Airlines, Delta Air Lines and United Airlines Stock: Bottom Line
Overall, American Airlines has a Growth Grade of F, a Momentum Grade of A and an Earnings Estimate Revisions Grade of C. Delta Air Lines has a Growth Grade of F, a Momentum Grade of B and an Earnings Estimate Revisions Grade of D. Meanwhile, United Airlines has a Growth Grade of F, a Momentum Grade of B and an Earnings Estimate Revisions Grade of D.
Whether this makes them good investments depends on your goals and risk tolerance. AAII can help you figure out both and identify which investments align with what works best for you.
We do so through a program of education that teaches you to invest for yourself and become an effective manager of your own wealth — no more relying on others for your financial independence. You can rely on AAII for timeless articles on financial planning and stock-picking, unbiased research and actionable analysis that makes you a better investor.
A+ Investor adds to that qualitative teaching by giving you a powerful data suite that helps you whittle down investment decisions, find stocks, exchange-traded funds (ETFs) or mutual funds that meet your needs and understand your portfolio at a more detailed level.
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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