2 ‘Strong Buy’ Airline Stocks to Preview Earnings

We are in Q2 earnings season and investors are paying attention. Expectations are high for a booming earnings season, with results well above expectations – such an outcome would be right in line with past quarters results, which had an average positive surprise of 18%.

So far, the early reporters are carrying on the positive vibes. It is a tumultuous time for investors as the economic recovery from the pandemic crisis has pushed earnings results well above historical norms.

That’s the background. Now let’s get into some specifics. Cowen’s Helene Becker looks at the aviation industry, and for the aviation industry as a whole, Becker sees some significant headwinds. International travel has not recovered and continues to face low demand, government restrictions and COVID regulation. Fuel prices are rising, but have not – yet – been fully priced into airline tickets.

At the same time, these headwinds are offset by strong demand for domestic travel; And here, Becker notes, the uptick is giving airlines a bigger boost than other companies, especially specific ones. “We are focused on airlines with a strong domestic leisure exposure, especially in markets with a lot of outdoor activities,” the 5-star analyst writes, pointing to an important link to the current environment. The COVID restrictions are lifted, but could be re-imposed – we can travel by air, but leisure activities this summer will avoid indoor locations that must be masked.

So let’s take her advice. We have used the TipRanks platform to look at two airlines with “domestic leisure exposure” and ready to report quarterly financial data. Both stocks have strong buying consensus, upside potential between 35% and 45%, and recently got the thumbs up from Wall Street, let’s take a closer look.

Alaska Air (ALK)

First, Alaska Air has a long-standing reputation for both quality and safety. The airline serves the state of Alaska along with the North American Pacific coast, connecting Alaska and West Coast departures with destinations in the US and to Canada, Mexico, Belize and points to the south. The airline’s primary hub is in Seattle, Washington, a central location within the service area. ALK is a member of the third largest airline alliance group in the world, Oneworld.

In January of this year, Alaska Air took delivery of its first 737 MAX 9 aircraft from Boeing. The acquisition marked the beginning of a 68-aircraft purchase agreement that will see Alaska Air replace its aging fleet of Airbus aircraft. Delivery is planned for the next 4 years, with a peak of 20 aircraft in 2022. ALK has an option to purchase a further 58 aircraft under the agreement.

Alaska has also expanded its reach. Just this past May and June, ALK began service to Belize in Central America; has expanded its service to and from Boise, Idaho; and has expanded its global reach through a codeshare agreement with Qatar Airways.

ALK will announce its Q2 results today (July 22). The Street expects revenue to reach $1.52 billion, well above the $421 million reported in the same period last year. Ultimately, the consensus favors earnings per share of -$0.45, up 87.3% year-over-year. Over the past 2 years, ALK has exceeded EPS estimates 88% of the time, while ahead of revenue forecasts 75% of the time.

Alaska Air decks for Raymond James, aviation expert Straight Savanthi writes: “We continue to see favorable risk rewards for ALK, which also provides leverage for the recovery in business demand without the risk of further delays in reopening long-range international markets. Longer term, we remain positive versus the cheap/capital efficient DNA, the relatively intact balance sheet with the ability to deleverage faster than comparable companies…”

In her near-term outlook for ALK, Syth makes the same point as Cowen’s Becker: “Alaska should see a slightly faster earnings recovery due to greater exposure to both the domestic and leisure markets.”

These comments support Syth’s Strong Buy rating for ALK stock, and her $78 price target implies room for 35% upward growth in the coming year. (To view Syth’s track record, click here.)

The Wall Street consensus on Alaska Air is clear that everyone is on board with RJ’s Syth. The stock’s 8 recent reviews are all positive, making for a unanimous Strong Buy consensus rating. The shares are selling for $57.59 and their average price target of $82.14 suggests a robust 43% year-on-year increase. (Check out Alaska Air’s stock analysis on TipRanks.)

Southwest Airlines (LUV)

And now we look at the market leader among low-cost airlines. Over the years, Southwest has managed to pull off the seemingly impossible: a reputation for both discount prices and solid customer service. In addition, Southwest was able to maintain an enviable safety record. All of this made the airline one of the industry’s long-term success stories. One statistic will tell the story: Prior to the coronavirus crisis, Southwest posted $2.3 billion in net income for 2019, 47 years in a row of net profits.

In June of this year, Southwest celebrated its 50th anniversary. The company marked the date by unveiling a Boeing 737-800 bearing the American flag and the word “Freedom,” identifying the aircraft as Freedom One. In a move that has more interested travelers, the company also announced a sale price of 50% off the base rate for three days during the anniversary week.

Like ALK above, Southwest will also be announcing Q2 results today. The consensus forecast for EPS for the second quarter is a net loss of 25 cents. If accurate, this will be a strong yoy improvement; the company lost $2.67 a share in the same quarter a year ago.

Industry watchers will watch the Q2 release carefully for liquidity data. Southwest has the best balance sheet of US airlines, closing the past calendar year with more than $14.3 billion in cash against just $10.3 billion in debt. The company had $11.9 billion in cash and cash equivalents at the end of 1Q21.

Conor Cunningham covers LUV inventory for MKM Partners, noting the airline’s strengths, writing, “Southwest is well positioned in the US domestic market given their relative balance sheet strength, low-cost order book, business opportunity and ability to drive price down given their cost structure. We believe there will be even more gains for the stock as markets reopen and the company begins to grow again.”

Cunningham is most impressed with the company’s solid balance sheet and sees it as a major draw for investors. The analyst writes about the company’s liquidity status: “Southwest is the only airline with an investment grade rating in the US. The company has weathered the pandemic better than most from a liquidity perspective. The company has a net cash position and that position has expanded during the pandemic.”

All in all, it’s clear why Cunningham rates LUV as a buy. Its price target of $74 points to upside potential of 39% for the next 12 months. (To view Cunningham’s track record, click here.)

There are 9 recent reviews here, and they list 8 purchases at just a single hold. The stock trades at $53.13 and has an average price target of $73.29, implying a 38% gain for one year. (Check out Southwest’s stock analysis on TipRanks.)

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Disclaimer: The opinions expressed in this article are those of the recommended analysts only. The content is for informational purposes only. It is very important to do your own analysis before making any investment.