In this article, I have evaluated airline stocks Virgin Galactic Holdings, Inc. (SPCE) and Hongkong-based Cathay Pacific Airways Limited (CPCAY) to predict the potential buy for this year. After thoroughly evaluating these stocks, I think that CPCAY might be a superior choice for the reasons discussed in this article.

The worldwide airline sector is expected to grow in the next few years, owing to rising disposable income, rapidly growing middle class, and increased travel demand. Furthermore, the price of jet fuel is expected to stay relatively stable over the coming years, allowing airlines to levy surcharges and earn additional revenue from passenger and freight transport.

The global airline industry market is projected to grow at a CAGR of 25.5% until 2027.

Moreover, this year, IATA forecasts the airline industry’s net profit to reach $25.7 billion (2.7% net profit margin), a slight improvement over 2023, which is expected to show a $23.3 billion net profit (2.6% net profit margin). The industry’s operating profits are expected to reach $49.30 billion in 2024, and total revenues are expected to grow 7.6% year-over-year to a record $964 billion.

The IATA forecasts that 4.7 billion people will travel in 2024, a historic high exceeding the pre-pandemic level of 4.5 billion in 2019.

Moreover, CPCAY is a clear winner in terms of price performance, as SPCE has declined 42.2% over the past nine months as compared to CPCAY’s 0.7% gain. Also, SPCE declined 49.3% over the past six months compared to CPCAY’s 8.2% decline.

Here are the reasons why I think CPCAY might perform better in the near term:

Recent Developments

On December 19, 2023, SPCE announced that the ‘Galactic 06’ flight window will open on January 26, 2024. This will be the Company’s 11th spaceflight to date and will follow a year of unprecedented human spaceflight achievements that included six suborbital spaceflights in six months. Four private astronauts from three different countries will journey to space on SPCE’s sixth commercial spaceflight.

Recent Financial Results

SPCE’s revenues for the third quarter ended September 30, 2023, came in at $1.73 million. The company’s net loss came in at $104.60 million. Also, its net loss per share stood at $0.28 and adjusted EBITDA came in at negative $87.28 million.

On the contrary, CPCAY’s total revenue for the six months that ended June 30, 2023, rose 135% year-over-year to HK$43.59 billion ($5.57 billion). Its operating profit came in at HK$8.77 billion ($1.12 billion), compared to an operating loss of HK$1.25 billion ($159.82 million) in the year-ago quarter. For the same period, its profit attributable to the shareholders of CPCAY and earnings per ordinary share came in at HK$4.27 billion ($545.95 million) and HK$55.2, compared to a loss of HK$5 billion ($639.28 million) and loss per share of HK$82.3, respectively.

Past And Expected Financial Performance

Over the past year, SPCE’s revenue grew at a CAGR of 206.8%. Its revenue is expected to increase 201.9% in the year ended December 2023 and 243.8% in the fourth quarter ended December 2023. Its EPS is expected to be negative $1.56 in the year ended December 2023, negative $0.30 in the fourth quarter ended December 2023 and negative $0.30 in the current quarter ending March 2024.

Conversely, CPCAY’s revenue has increased at a CAGR of 57.6% over the past year. Analysts expect CPCAY’s revenue to grow by 84.4% in the year ended December 2023.

Valuation

SPCE’s forward P/S multiple of 120.85 is higher than CPCAY’s 0.54. Additionally, SPCE’s forward EV/Sales multiple of 40.82 is higher than CPCAY’s 1.23.

Thus, CPCAY is more affordable.

Profitability

SPCE’s trailing-12-month ROCE of negative 90.56% is lower than CPCAY’s 4.46%. In addition, SPCE’s trailing-12-month ROTC of negative 32.71% is lower than CPCAY’s 5.02%.

Thus, CPCAY is more profitable.

POWR Ratings

SPCE has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. Conversely, CPCAY has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SPCE has an F grade for Stability, which is justified by its 24-month beta of 2.25. On the other hand, CPCAY has a B grade for Stability, which is in sync with its 24-month beta of 0.24.

Among the 28 stocks in the Airlines industry, SPCE is ranked #24, while CPCAY is ranked #2. 

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, Quality, and Sentiment. Get all SPCE ratings here. Click here to view CPCAY ratings.

The Winner

The airline industry is capitalizing on rising disposable income, rising interest in experience travel and the growth of the tourism and travel market. Moreover, the pent-up demand for travel is fueling the industry. SPCE and CPCAY should benefit from these industry tailwinds.

However, SPCE’s poor profitability, elevated valuation and high beta value make its competitor CPCAY the better buy.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Airlines industry here.  

What To Do Next?

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CPCAY shares were trading at $4.94 per share on Wednesday afternoon, down $0.27 (-5.15%). Year-to-date, CPCAY has declined -4.82%, versus a -1.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...

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