4 Solid Picks as OPEC's Refusal to Curb Output Boosts Airlines
Zacks Equity Research
Updated
The decision of the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – to not curb the output of crude, which was announced at its meeting in the Austrian capital of Vienna on Friday, Dec 4, turned out to be a boon for stocks in the airline space.
The gathering of the group's 12 member countries from the Middle East, Africa and Latin America decided that the daily crude production would be approximately 31.5 million barrels (the previous production cap was officially 30 million barrels). The cartel’s move defied expectations of an output cut in response to the prevailing supply glut.
Airlines Soar on OPEC Decision
The group’s ruling resulted in major airline players like Alaska Air Group, Inc. ALK, United Continental UAL, Southwest Airlines LUV American Airlines Group AAL and Delta Air Lines DAL gaining significantly. Consequently, it was no surprise that the NYSE ARCA Airline index gained 2% to close at $92.75 on Dec 4 over the preceding day’s figure.
In fact, the concern of oversupply is nothing new and has been responsible for the massive fall in oil prices. Currently, oil prices are hovering around the $40 per barrel mark. This represents a significant decline from the approximate $105 per barrel that oil traded in July, last year.
The drop in oil prices has reduced the airline companies’ operating expenses significantly, thereby aiding the bottom line. OPEC’s decision not to curb output despite the slump in prices means that the oversupply will continue to haunt the energy space. This implies good times ahead for airline carriers.
Given this backdrop, it is no surprise that the OPEC oil cartel’s refusal to cut output and let the commodity slide has positively impacted the airline space.
Low Fuel Costs = Massive Savings, Surge in Buybacks
Weak oil prices have resulted in tremendous savings for carriers. The persistent drop in oil prices has significantly boosted the bottom line of airline stocks in the past quarters helping them deliver solid outcomes on the earnings front. For example, American Airlines Group, which does not hedge fuel costs, expects to generate savings of approximately $5 billion in 2015.
The massive savings have certainly cushioned the financial health of carriers. This has prompted the companies to launch share buyback programs, make increased dividend payments and significantly reduce their debt levels.
The OPEC decision is likely to further assure airline companies that they will continue to generate gigantic savings going forward. Consequently, their financial status will also remain solid. In view of this, buyback activity is likely to increase further in the airline space thereby benefiting shareholders.
Our Picks
The OPEC decision certainly bodes well for companies in the airline space. Given this scenario, this may be just the right time to pick stocks from the sector, which possess strong growth potential. Our selection is also backed by a good Zacks Growth Score and a favorable Zacks Rank.
We have narrowed our choices on the basis of new style score system.
Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the growth investing space.
Hawaiian Holdings HA, the holding company of Hawaiian Airlines, was founded in 1929 and is headquartered in Honolulu, Hawaii. Hawaiian Holdings has a Zacks Rank #1 and a Growth Style Score of ‘B.’
The company has expected earnings growth of 98.1% for the current year. Over the last 60 days, the 2015 Zacks Consensus Estimate of earnings has gone up 34 cents to $3.07 per share. Likewise, the estimate for 2016 has jumped 37 cents over the last 60 days to $3.31 per share. The long-term estimated earnings growth rate of 33.4% at the company exceeds the industry average of 18.4%.
SkyWest SKYW was founded in 1972 and is headquartered in St. George, UT. SkyWest sports a Zacks Rank #1 and a Growth Style Score of ‘B.’
The company has expected earnings growth rate in excess of 100% for the current year. Earnings per share estimates have risen for 2015 (up 13 cents to $1.93 over the last 60 days) as well as 2016 (up 23 cents to $2.10 over the same period).
Delta Air Lines, based in Atlanta, GA and founded in 1924, provides scheduled air transportation for passengers and cargo worldwide. Delta has a Zacks Rank #2 and a Growth Style Score of ‘A.’
The company has expected earnings growth rate of 41.25% for the current year. Over the last 60 days, the 2015 Zacks Consensus Estimate of earnings has gone up 8 cents to $4.62 per share. Likewise, the estimate for 2016 has jumped 17 cents over the last 60 days to $5.65 per share. The long-term estimated earnings growth rate of 23.8% at the company exceeds the industry average of 18.4%.
Our final choice rests on Dallas-based low-cost carrier Southwest Airlines. Southwest Airlines, founded in 1967, holds a Zacks Rank #2 (Buy) and a Growth Style Score of ‘A.’
The company has an expected earnings growth rate of 75.58% for the current year. Over the last 60 days, the 2015 Zacks Consensus Estimate of earnings has gone up 6 cents to $3.53 per share. Likewise, the estimate for 2016 has jumped 24 cents over the 60 days to $3.98 per share. The long-term estimated earnings growth rate of 21.6% at the company exceeds the industry average of 18.4%.
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