Airline Stocks: A Bargain After Recent Declines?
Airline stocks have taken a significant hit recently, underperforming for the third straight month. According to Bank of America (BofA), some of the most profitable airlines are now trading at a discount after softer guidance led analysts on Wall Street to downgrade earnings estimates.
In July, airline stocks fell by 6.9%, starkly lagging behind the S&P 500's 1.1% return. This decline was driven by negative 'EBITDAR' revisions due to broadly weak guidance updates.
American Airlines Group, along with domestic carriers Spirit Airlines Inc. and JetBlue Airways Corp., experienced the deepest negative revisions under pressure from a weak revenue environment and an oversupplied domestic market. BofA notes these stocks saw an average revision of 14.6%.
American Airlines' Struggles and Industry-Wide Capacity Glut
In Q2, American Airlines Group Inc. reduced its unit revenue guidance for the year, citing an industry-wide capacity glut. However, the steep slump in stock prices has pushed some of the most profitable airline stocks below their historical ranges, offering deep discounts.
Potential Bargains in Airline Stocks
On a 2024 earnings before interest, taxes, depreciation, amortization, and restructuring or rent cost (EBITDAR) estimate ratio, about 67% of airline stocks are now trading below the midpoint of historical ranges. Furthermore, BofA estimates that 44% of airlines are trading below their historical midpoint for 2024 and 2025.
United Airlines Holdings Inc. and Alaska Air Group Inc. offer the steepest discounts among the group, trading at 13.7% and 13.3% discounts to their historical midpoint on 2025 EBITDAR estimates. Meanwhile, Delta Air Lines Inc. trades nearly in line with a 0.6% premium.
Elevated EBITDAR Multiples for JetBlue and Spirit
Contrarily, JetBlue Airways Corp. and Spirit Airlines Inc. are trading at elevated EBITDAR multiples, showing premiums of 92.7% and 512.4%, respectively, compared to their historical multiples. This is attributed to significant leverage and EBITDAR that is 44% and 76% higher, respectively.
Understanding EBITDAR
For those unfamiliar with EBITDAR, it stands for Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent costs. This metric helps in assessing a company's operational performance without the impact of its capital structure, tax rates, and non-cash items.
What Does This Mean for Investors?
For investors, this could be an opportunity to buy into some of the most profitable airline stocks at reduced prices. However, it's crucial to conduct thorough research and consider the broader economic trends and market conditions before making investment decisions.
