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By Laura Hoy
| October 27, 2016
Over the last few years, falling oil prices have helped airline stocks regain their footing and return to profitability after a rough patch that saw many carriers file for bankruptcy. While the benefits of lower fuel prices have already been priced in, the sector still offers investors some good long-term investment options.
The airline industry carries a lot of risk with macroeconomic factors, safety records and public perception all weighing on airlines’ bottom lines. With that being said, air travel is becoming increasingly popular and accessible, making it a good place to park your money for the long-term.
While flagship carriers like American Airlines Group Inc. (AAL) may be the first investment options that spring to mind, there are several other airline stocks that are poised to deliver impressive gains by 2017.
Here’s a look at three airline stocks with great growth potential that investors should consider adding to their portfolios.
Aurelijus Valeiša via Flickr
European low-cost airline Ryanair Holdings plc (RYAAY) is a good place to start when it comes to airline investments. RYAAY has consistently delivered impressive growth from quarter-to-quarter and has an impeccable safety record, making it a good buy within the industry. Ryanair has considerably stronger financials than other airline companies — its debt-to-equity ratio stands at just 105% compared to 125% at United Continental Holdings Inc. (UAL) or 530% at AAL.
Now is a great time to buy RYAAY as well. Brexit worries have weighed on European companies and Ryanair recently issued a profit warning due to the pound’s sharp decline in the aftermath of the vote, cutting its guidance by 5%, which caused many investors to abandon the airline. While this is certainly a headwind for RYAAY, the company’s performance in times of trouble is one good reason to jump on board now.
Currency headwinds are expected to drag Ryanair profits down 5% according to management, but even that lower guidance still predicts a 7% increase in profit for the full year. The firm has been successful in ensuring its planes are nearly sold out with the its load factor expected to be 94% this year. Not only that, but Ryanair’s low-cost model has made it an popular choice among travelers and passenger numbers are expected to rise by 12% this year despite the macroeconomic concerns that came with the U.K.’s exit from the European Union.
If investors are willing to wait for the Brexit turmoil to blow over, RYAAY is a great buy. Once the pound recovers, the airline’s profits will see a massive boost.
Bill Abbott via Flickr
If you believe that Brexit is more than just a temporary market panic, then Hawaiian Holdings, Inc. (HA) is a good play.
Hawaiian Airlines was one of the only major airlines to remain insulated from the impact of the Brexit because the company doesn’t operate any flights to the U.K. Instead, HA has reaped the benefits of lower fuel costs at a time when demand for flights to Hawaii are on the rise.
While rising fuel costs will hurt HA to some extent, the company has been investing in fuel-efficient aircraft, which will help mitigate some of those expenses and its fuel hedges will keep the firm from being overwhelmed should prices rise sharply.
Hawaiian Airlines also has several opportunities for growth in the coming year. First, the company is expanding its service from Hawaii to Japan, a profitable route for the company considering the yen’s improvement against the dollar.
The company is also improving its premium offerings with lie-flat seats and a new bidding program that allows travelers to bid for upgrades shortly before their flights.
Courtesy Delta Airlines
Delta Air Lines, Inc. (DAL) has taken a beating this year. The firm’s share price has fallen nearly 20% year-to-date and the airline’s most recent earnings call showed that the company had a very disappointing summer season. Brexit worries and currency headwinds have also weighed on the company’s bottom line, leaving DAL stock in a precarious position.
However, for the long-term value investors, now is a good opportunity to pick up a financially sound airline such as Delta Air Lines at a bargain price. With a price-to-earnings ratio of just 6.7, DAL stock is relatively cheap right now and the firm’s 2% dividend yield gives investors some incentive to ride out the company’s rough-patch.
As big-name airlines go, DAL is in a good financial position as well, with a debt-to-equity ratio of just over 60%, far below most if its peers.
As of this writing, Laura Hoy was long RYAAY.
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