The airline industry is recovering and is expected to report profits this year for the first time since the pandemic. Therefore, I recommend that investors consider buying airline stocks Deutsche Lufthansa AG (DLAKY) and Qantas Airways Limited (QABSY).
On the other hand, the industry may face operational challenges. Hence, it could be ideal to avoid Spirit Airlines, Inc. (SAVE) and Virgin Galactic Holdings, Inc. (SPCE), due to their weak fundamentals and growth prospects.
As per the International Air Transport Association (IATA), the airline industry is expected to make a net profit of $4.70 billion in 2023, with over 4 billion passengers expected to travel. The industry is also expected to generate total revenues of $779 billion, mainly due to a continued recovery in passenger demand.
However, operational challenges such as supply chain bottlenecks and staffing issues might continue to challenge the US airline industry. Furthermore, given the high fuel prices and rising capital costs, airlines may find it challenging to expand their capacity incrementally.
Moreover, delivery delays have become widespread for manufacturers and a shortage of aircraft is emerging due to the loss of production of 2,400 planes that were not built because of the pandemic.
Stocks to Buy:
Deutsche Lufthansa AG (DLAKY)
Headquartered in Cologne, Germany, DLAKY operates as an aviation company in Germany and internationally. It operates through Network Airlines; Eurowings; Logistics Business; Maintenance, Repair and Overhaul Services; and Catering Business segments.
DLAKY’s forward EV/EBIT of 8.95x is 38.3% lower than the industry average of 14.51x. Its forward EV/Sales multiple of 0.50 is 69.3% lower than the industry average of 1.62.
DLAKY’s total revenue increased 52.2% year-over-year to €12.83 billion ($13.75 billion) during the fiscal year that ended December 31, 2022. Its other revenue increased 61.8% year-over-year to €1.12 billion ($1.19 billion), whereas other operating income increased 69.5% year-over-year to €1.48 billion ($1.59 billion).
Analysts expect DLAKY’s EPS to increase 77.8% year-over-year to $1.40 for the fiscal year ending December 2023. Its revenue is expected to increase 16.4% year-over-year to $40.55 billion for the same year. Also, it has surpassed revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 84% over the past nine months to close its last trading session at $10.91. It has gained 27.5% over the past three months.
DLAKY’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
DLAKY is also graded a B in Growth and Value. It is ranked #2 out of 27 stocks in the B-rated Airlines industry.
Beyond to the POWR Rating grades just highlighted, one can access DLAKY’s rating for Sentiment, Momentum, Quality, and Stability here.
Qantas Airways Limited (QABSY)
Based in Mascot, Australia, QABSY provides air transportation services in Australia and internationally. The company operates through Qantas Domestic; Qantas International; Jetstar Group; and Qantas Loyalty segments.
QABSY’s forward EV/Sales of 0.73x is 54.7% lower than the industry average of 1.62x. Its forward Price/Sales multiple of 0.61 is 52.4% lower than the industry average of 1.29.
During the half year that ended December 31, 2022, QABSY’s revenue and other income increased 222.3% year-over-year to AUD9.91 billion ($6.60 billion). Its statutory profit for the period came in at AUD1 billion ($666.49 million), compared to a loss of AUD456 million ($303.92 million) in the previous half-year.
Also, its earnings per share attributable to members of QABSY came in at AUD0.53 compared to negative AUD0.24 in the prior half year.
QABSY’s revenue is expected to increase 105.6% year-over-year to $12.94 billion during the current fiscal year ending June 2023. Its EPS is expected to come in at $3.38 for the same year.
The stock has gained 29.6% over the past nine months to close the last trading session at $21.44.
It’s no surprise that QABSY has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
QABSY also has an A grade for Growth and Quality and a B for Value. It is ranked first in the same industry.
Click here to see the POWR Ratings of QABSY (Momentum, Stability, and Momentum).
Stocks to Avoid:
Spirit Airlines, Inc. (SAVE)
SAVE is an airline service provider that connects 85 destinations in 16 countries across the United States, Latin America, and the Caribbean. It sells tickets via its call centers, airport ticket counters, and several third parties, including online, traditional, and electronic global distribution channels.
SAVE’s forward EV/EBIT of 32.21x is 122% higher than the industry average of 14.51x. Its forward non-GAAP P/E multiple of 32.51 is 97.6% higher than the industry average of 16.46.
During the fourth quarter that ended December 31, 2022, SAVE’s total operating expenses increased 61.8% year-over-year to $1.70 billion. The company’s net loss increased 210.5% year-over-year to $270.66 million, and net loss per share increased 211.3% year-over-year to $2.49.
Street expect SAVE’s EPS to be negative $0.50 for the current fiscal quarter ending March 2023. Its revenue is expected to be $1.36 billion for the same quarter.
The stock has declined 25.1% over the past six months to close its last trading session at $17.05.
SAVE’s bleak outlook is reflected in its POWR Ratings. The stock has an overall rating of D, which translates to a Sell in our POWR Rating system.
SAVE is also graded a D in Sentiment and Quality. It is ranked #27 in the same industry.
In addition to the POWR Rating grades stated above, SAVE’s rating for Value, Momentum, Growth, and Stability can be seen here.
Virgin Galactic Holdings, Inc. (SPCE)
SPCE focuses on the development, manufacture, and operation of spaceships and related technologies for conducting commercial human spaceflight and flying commercial research and development payloads into space. It is also involved in the ground and flight testing, and post-flight maintenance of its spaceflight system vehicles.
SPCE’s forward EV/Sales of 77.96x are significantly higher than the industry average of 1.62x. Its forward Price/Sales multiple of 115.58 is significantly higher than the industry average of 1.29.
During the fiscal fourth quarter that ended December 31, 2022, SPCE’s revenue came in at $869 thousand. Its adjusted EBITDA decreased 104.9% year-over-year to negative $132.75 million, and its operating loss increased 88.6% year-over-year to $153.31 million. Net loss widened 86.7% year-over-year to $150.82 million, while its net loss per share increased 77.4% year-over-year to $0.55.
SPCE’s revenue is expected to be $600 thousand in the current fiscal quarter ending March 2023. Its EPS is expected to decline 50.5% year-over-year to negative $0.54 for the same quarter. Also, the stock has failed to surpass the EPS estimates in each of the trailing four quarters, which is disappointing.
The stock has plunged 26.4% over the past year to close the last trading session at $5.00.
SPCE has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system.
SPCE also has an F grade for Stability, Sentiment, and Value and a D for Quality. It is ranked last in the same industry.
To access SPCE’s POWR Ratings for Growth and Momentum, click here.
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DLAKY shares were trading at $10.40 per share on Wednesday morning, down $0.51 (-4.67%). Year-to-date, DLAKY has gained 26.29%, versus a 0.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...
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