2 ‘Strong Buy’ Airline Stocks to Watch Ahead of Earnings

We are in Q2 earnings season and investors are paying attention. There are high hopes for a sprawling earnings season, with results well above expectations – such a result would be in line with results for recent quarters, which had an average positive surprise of 18%.

So far, the early reporters have carried the positive mood. It’s a heady time for investors as the economic recovery from the pandemic crisis has pushed earnings results well above historical norms.

That is the background. Now we come to some specifics. Cowen’s Helane Becker takes a look at the airline industry, and Becker sees some major headwinds for the air travel industry as a whole. International travel has not recovered and is still facing low demand, government restrictions, and COVID regulations. Fuel prices are rising, but are – not yet – fully factored into the airfare.

At the same time, this headwind is offset by strong demand for domestic travel; And here Becker notes that the recovery is giving airlines a bigger boost than other companies, especially certain ones. “We are concentrating on airlines with a high level of leisure activities domestically, especially in markets with a lot of outdoor activities,” writes the 5-star analyst and points out an important connection for the current environment. COVID restrictions will be lifted but may be reintroduced – we can travel by air, but leisure activities this summer will avoid indoor events that require masking.

So let’s take their advice. We used the TipRanks platform to look at two airlines with “Domestic Leisure Travel” and be ready to report the financial results for the quarter. Both stocks have a consensus rating of Strong Buy, upside potential between 35% and 45%, and have been positively valued by Wall Street recently. Let’s take a closer look.

Alaska Air (ALK)

First off, Alaska Air has a longstanding reputation for quality and safety. The airline serves the state of Alaska together with the North American Pacific coast and connects the starting points of Alaska and the west coast with destinations in the USA and to Canada, Mexico, Belize and the south. The airline’s main hub is in Seattle, Washington, a central location within their service area. ALK is a member of the third largest airline alliance group in the world, Oneworld.

The story goes on

In January of this year, Alaska Air acquired its first 737 MAX 9 airliner from Boeing. The acquisition marked the beginning of a purchase agreement for 68 aircraft that Alaska Air will use to replace its obsolete fleet of Airbus aircraft. Delivery is planned for the next 4 years, with 20 aircraft peaking in 2022. Under the agreement, ALK has the option to acquire an additional 58 aircraft.

Alaska has also expanded its reach. It was only last May and June that ALK began serving 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 publish its Q2 results today (July 22nd). The Street expects sales of $ 1.52 billion, well above the $ 421 million reported in the same period last year. The bottom line is that the consensus calls for earnings per share of $ -0.45, an increase of 87.3% over the previous year. Over the past 2 years, ALK has exceeded EPS estimates 88% of the time and exceeded sales forecasts 75% of the time.

Regarding Alaska Air for Raymond James, airline expert Savanthi Syth writes: “We continue to see a favorable risk / return ratio for ALK, which also provides leverage to recover business demand without the risk of further delays in reopening international long-haul market. In the longer term, we continue to view the cost-effective / capital-efficient DNA, the relatively undisturbed balance sheet and the ability to reduce debt more quickly than competitors as positive … “

In her near-term outlook for ALK, Syth does the same as Becker von Cowen: “Alaska should see a slightly faster profit recovery due to its increased exposure to the domestic and recreational markets.”

These comments support Syth’s strong buy rating on ALK shares, and their target price of $ 78 implies room for up 35% growth over the coming year. (To see 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 8 most recent reviews of the stock are all positive, resulting in a unanimous consensus rating for Strong Buy. The shares sell for $ 57.59, and their average price target of $ 82.14 indicates a robust year-long uptrend of 43%. (See Alaska Air’s stock analysis at TipRanks.)

Southwest Airlines (LUV)

And now let’s take a look at the industry leader among low-cost carriers. Southwest has managed to create the seemingly impossible over the years: a reputation for both affordable prices and solid customer service. In addition, Southwest held an enviable safety record. All of this together has made the airline one of the long-standing success stories in the industry. A statistic will tell the story: Before the Corona crisis, Southwest achieved a net profit of 2.3 billion US dollars for 2019, a net profit for 47 years in a row.

In June of this year, Southwest celebrated its 50th anniversary. The company marked the date by unveiling a Boeing 737-800 adorned with the US flag and the word “Freedom,” referring to the aircraft as Freedom One. To increase the interest of travelers, the company also announced a 50% discount on the basic price for three days during the anniversary week.

As with ALK above, Southwest will publish its second quarter results today. The consensus forecast for earnings per share in the second quarter envisages a net loss of 25 cents. If it’s right, this will be a huge improvement over last year; The company lost $ 2.67 per share in the year-ago quarter.

Industry watchers will carefully look for liquidity data on the second quarter release. Southwest has the best record of any US carrier, ending the last calendar year with over $ 14.3 billion in cash versus just $ 10.3 billion in debt. The company had cash and cash equivalents of $ 11.9 billion at the end of Q1 21.

Conor Cunningham, on the LUV stock for MKM Partners, citing the airline’s strengths, writes: “Southwest is in the US domestic market because of its relative balance sheet strength, low backlog, business opportunity and ability to price given its cost structure to press, well positioned. We believe that as markets reopen, the stock will continue to move higher and the company will begin 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 investment grade airline in the US. The company weathered the pandemic better than most from a liquidity perspective. The company has a net cash position and that position has grown during the pandemic. “

All in all, it’s clear why Cunningham rates LUV as a buy. Its target price of $ 74 suggests an upside of 39% over the next 12 months. (To see Cunningham’s track record, Click here.)

There are 9 current reviews here, including 8 purchases for just a single hold. The stock trades for $ 53.13 and has an average price target of $ 73.29, which is a year-long uptrend of 38%. (See Southwest’s stock analysis at TipRanks.)

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

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