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Coronavirus Makes Airline Stocks a Screaming Buy: 5 Picks

Manaswita Ghosh Dutta

The impact of the coronavirus woes may have loomed large on the U.S. airlines industry for the past few weeks and still continues unabated but the industry is well-equipped to overcome such setbacks. In fact, steps have already been taken to contain the economic damage that this black swan event poses to the country’s major airline operators. All these actions are expected to be reflected ahead.

Despite how the airlines industry may fare at present, there’s no better time to dive into these stocks than it is right now. This is because certain quality airline stocks are now trading much below their worth. In addition, the nosedive suffered by these stocks is a temporary blip that is expected to turn around soon.

Coronavirus Impact on Airlines

The fast-spreading disease has taken a toll on businesses for a while now, especially on companies that are integral to the travel sector, such as airlines. Airlines companies witnessed a significant drop in passenger traffic over the past few weeks as customers cancel their bookings and corporates prefer online meetings to face-to-face interactions.

In just a month, shares of some of the giant air carriers, such asLATAM Airlines Group S.A. LTM, Spirit Airlines, Inc. SAVE and American Airlines Group Inc. AAL have shed more than 40%. Decrease in travel demands across continents is hampering airline business.

In addition, earlier this week, President Donald Trump temporarily suspended travel from most of Europe to the United States. The restrictions are expected to be effective Mar 13 and last for 30 days.

Per The Guardian, these restrictions are applicable to primarily foreigners who paid a visit to the enlisted 26 countries in the Schengen area during the past two weeks before their planned arrival in the United States. These travel restrictions could impact airline stocks in the near term.

However gloomy the airlines industry may appear right now, the space is looking for a recovery ahead. Let’s delve deeper.

Airlines Well-Prepared to Fight This Plunge: Here’s Why

First, some of the major carriers in the country initiated cost-cutting measures. During an online-investor conference convened by J.P. Morgan, an array of airlines announced that they are opting for flight cuts, spending curtailment, a freeze on hiring, putting some big spending plans on hold and cutting back remunerations. These steps will ensure that the companies have enough cash stashed for later.

Second, companies such as UnitedAirlines, American Airlines and DeltaAirlines stalled their own stock buybacks, per a report by The New York Times. United Airlines spent $8.6 billion on buybacks in the past five years but decided to stop later in February. DeltaAirlines spent $10.1 billion on buybacks over the same period after announcing earlier this week that it was halting buybacks. American Airlinesspent $11.9 billion on buybacks in the last five years.

In addition, all these companies have abundant liquid assets to ride through the current scenario. American Airlines has more than $7.3 billion while management at Delta Airlines stated that it expects liquidity of a minimum $5 billion by the end of the first quarter of 2020 and had $20 billion in assets that are free of debt. United Airlines had $8 billion in liquidity, comprising $2 billion in new financing, raised earlier this week.

Third, oil prices are a major factor that needs to be taken into account in airlines’ spending. Given the downward curve taken by oil, it’s quite clear that airlines are already saving big on fuel costs and could continue to do so for a while.

Fourth, the President’s emergency package could provide some relief to the country’s airlines. These could include temporary suspensions of some excise taxes, such as the 7.5% tax that air carriers pay to the Federal Aviation Administration.

Finally, according to The International Air Transport Association’s (IATA) forecast in 2018, air traffic could double up to 8.2 billion in 2037.Over the next 20 years, the forecast expected a CAGR of 3.5%, indicating to double the number of passengers travelling from the 2018-levels.

To wrap up, although airline companies’ near-term earnings may get affected because of the coronavirus fright, the long-term projections are likely to stay in place, given the airlines’ strong balance sheets and measures to overcome this disruption.

In addition, the disruption caused by the coronavirus situation is temporary since several drugmakers are working on developing a vaccine rapidly. These developments are bound to yield results soon.

5 Stocks to Consider

We therefore handpicked five airline stocks that have incurred considerable losses over the past month. Investors seeking quality stocks at rock-bottom prices may consider these. All stocks belong to the Zacks Transportation - Airline industry.

LATAM Airlines is a provider of passenger and cargo air transportation services. Although shares of this company have declined 50.5% in the past month, the Zacks Rank #1 (Strong Buy) player’s expected earnings growth rate for 2021 is 58.5%. The Zacks Consensus Estimate for LATAM Airlines’ next-year earnings has moved 1.6% north in the past 60 days. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Shares of Spirit Airlines may have declined 60.4% in the past month but this Zacks Rank #2 (Buy) company’s expected earnings growth rate for the next year is 18.9%. The Zacks Consensus Estimate for Spirit Airlines’ next-year earnings has moved 9.4% north in the past 60 days.

Shares of Delta Air Lines, Inc. DAL may have declined 15.8% in the past month but this Zacks Rank #3 (Hold) company’s expected earnings growth rate for the next year is 14.9%. The Zacks Consensus Estimate for Delta Air Lines’ next-year earnings has moved 1.3% north in the past 60 days.

Shares of United Airlines Holdings, Inc. UAL, a Zacks #3 Ranked company, may have declined 38.2% in the past month but the company’s expected earnings growth rate for the next year is 21.3%.

Shares of American Airlines, a Zacks Rank #3 company, may have declined 47.4% in the past month but the company’s expected earnings growth rate for the next year is 25.6%.

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Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
 
United Airlines Holdings Inc (UAL) : Free Stock Analysis Report
 
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
 
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LATAM Airlines Group S.A. (LTM) : Free Stock Analysis Report
 
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