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Stock Strategist Industry Reports

Airlines Looking More Attractive

We think investors are overlooking the solid air traffic growth forecast for 2017.

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In December, we cautioned that airline stocks across the major network carriers ( United (UAL),  American (AAL), and  Delta (DAL)) and  Southwest (LUV) looked fully valued to slightly overvalued. However, we thought investors might find a more attractive entry point as a result of fare headwinds in the first half of 2017 combined with higher costs. Our thesis has begun to play out: Airline stocks have sold off on the back of deteriorating unit revenue guidance and are now trading at an average price/fair value estimate of 0.96 compared with 1.09 in December.

Among the U.S. airlines we cover, United looks the most attractive from a valuation standpoint, followed by American and then Delta. We like United’s new management team and believe that the turnaround story at the Chicago-based carrier has not yet played out. The stock is trading at a 0.89 price/fair value. On the other hand, Southwest continues to look slightly overvalued at a price/fair value of 1.11. Investors seem to be ascribing a premium to Southwest based on its historical performance without recognizing fundamental changes in the carrier’s business model and in the business model used by its peers.

Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.