It's the end of COVID restrictions. Packed planes are now at the airports, and airfares have risen. So, one would expect airlines to record high revenues and profits. So why are airline stocks falling and cheap?
You need to realize that macroeconomic factors are at play. If it is not in one already, America is about to enter a recession. The Federal Reserve is in a tight fight against inflation, using high-interest rates as a weapon. Last month’s interest rate hike was the highest since 1994. That is why plane tickets have risen sharply.
Airlines are also facing supply constraints. In some cases, there have been labor shortages due to the increased demand for travel during the summer. As a result, we have seen delays and cancellations during this period. Investors also fear the travel boom might cool off in the months ahead due to the high prices. In addition, businesses might reduce travel plans due to the increased fares. As a result, investors are not optimistic about the sector.
Most major airlines have seen their shares fall over the past month. United Airlines has fallen 17%, Delta Airlines 21%, and Southwest Airlines has done the same with a 15% fall. First, let us examine these airline stocks that are cheap right now. Then, we will consider their investment potential for the future.
1- Delta Air Lines Inc. (NYSE: DAL)
Delta Airlines shares are currently trading at $29. At the start of the year, the shares were trading at about $45. That means they have lost more than 25% of their value. Delta Airlines' last quarter results were impressive. It recorded a revenue of $8.2 billion. There were signs that it had recovered from the plunge in revenues seen in 2020 and 2021. The pandemic lockdowns made the demand for travel very low.
Domestic operations saw a 50% increase in revenue, while international operations saw an increase of 35%. That made it have a profit margin of 10% for the quarter.
In this quarter, Delta is hopeful that it will sustain the revenue increases. It foresees a recovery of 94% from the pre-pandemic levels. Also, management has said that the operating profit margin for this quarter would be about 12 to 14 percent.
The outlook for Delta Airlines is good. That is why it is wise to gobble it up now that it is cheap. But be mindful that airline stocks, like Delta Airlines, have seasonal cycles.
2- United Airlines Holdings Inc. (NASDAQ: UAL)
At the start of the year, UAL was trading at $50, now $36. This is because the company has rapidly recovered from the shortfall in revenue due to the pandemic. As a result, it had a low net loss last quarter, significantly lower than in the same quarter of 2021. One good thing about the company is that its load factor has increased.
The load factor is a metric that measures what percentage of seats on an airline are filled by paid passengers. For example, UAL’s load factor is about 56.8%, showing that most flights are more than half full.
We believe in the prospects of the company. Now that it is cheap, you can buy it long-term.
3- Southwest Airlines Co. (NYSE: LUV)
Last year, LUV was trading at $55, but today it is trading at $36. So it is now significantly cheaper. Like UAL, LUV reported a net loss for the last quarter. It reported a net loss of $278 million. This represents a loss of 47 cents per share. This is not bad because it has been facing pandemic travel shocks like other airlines.
But the company’s cash flow position is good and was about $1.1 billion as of April 2022. It also had net liquidity of $6 billion, which puts it on sound footing.
Southwest Airlines is among the airlines that will benefit from the surge in travel demand this summer. You could put it in your stock portfolio now that it is cheap.
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