We’re into the Q2 earnings season, and investors are paying attention. There are high hopes for a blowout earnings season, with results skewing sharply above expectations – such an outcome would be right in line with results from the past several quarters, which had an average positive surprise of 18%.
So far, the early reporters are bearing out the positive vibes. For investors, it’s a heady time, as the economic rebound from the pandemic crisis has pushed earnings results well above historic norms.
That’s the background. Now let’s get into some specifics. Cowen’s Helane Becker is taking a look at the airline industry, and for the air travel sector as a whole, Becker sees some important headwinds. International travel has not recovered, and still faces low demand, government restrictions, and COVID regulations. Fuel prices are rising, but have not – yet – been fully priced into airfares.
At the same time, these headwinds are balanced by strong demand for domestic travel; And here Becker notes that the rebound is giving airlines a bigger boost than other companies, particularly specific ones. “We are focused on airlines with strong domestic leisure exposure, especially in markets where there are a lot of outdoor activities,” the 5-star analyst writes, pointing out an important connection for the current environment. COVID restrictions are lifting, but may be reimposed – we can travel by air, but leisure activity this summer will avoid indoor venues that require masking.
So, let’s take her advice. We’ve used the TipRanks platform to look at two airlines with ‘domestic leisure exposure” and ready to report the quarter’s financials. Both of these stocks boast Strong Buy consensus ratings, feature an upside potential between 35% and 45%, and have recently been getting the thumbs up from Wall Street. Let’s take a closer look.
Alaska Air (ALK)
First up, Alaska Air, has a long-standing reputation for both quality and safety. The airline serves the State of Alaska, along with the North American Pacific Coast, connecting Alaskan and West Coast points of origin to destinations across the US and into Canada, Mexico, Belize, and points south. The airline’s primary hub is in Seattle, Washington, a central location within its service area. ALK is a member of the world’s third-largest airline alliance group, Oneworld.
In January of this year, Alaska Air took delivery of its first 737 MAX 9 airliner from Boeing. The acquisition marked the beginning of a 68-plane purchase agreement that will see Alaska Air replace its aging fleet of Airbus planes. Delivery is scheduled over the next 4 years, peaking with 20 aircraft in 2022. ALK has an option to purchase an additional 58 planes under the agreement.
Alaska has also been expanding its reach. In just this past May and June, ALK has begun service to Belize in Central America; has expanded its service to and from Boise, Idaho; and has enhanced its global reach through a codeshare agreement with Qatar Airways.
ALK will be releasing its Q2 earnings today (July 22). The Street is anticipating revenue to come in at $1.52 billion, far above the $421 million reported in the same period last year. On the bottom-line, consensus is calling for EPS of -$0.45, a year-over-year increase of 87.3%. Over the past 2 years, ALK has bettered EPS estimates 88% of the time, while coming ahead of revenue forecasts 75% of the time.
Covering Alaska Air for Raymond James, airline expert Savanthi Syth writes, “We continue to see favorable risk-reward for ALK, which also provides leverage to business demand recovery without the risk of further delays in long-haul international market reopenings. Longer term, we continue to view favorably its low-cost/capital-efficient DNA, relatively unimpaired balance sheet with an ability to deleverage faster than peers…”
In her outlook for ALK in the near term, Syth makes the same point as Becker from Cowen: “Alaska should see a somewhat faster earnings recovery due to its greater exposure to both the domestic and leisure markets.”
These comments support Syth’s Strong Buy rating on ALK shares, and her $78 price target implies room for 35% upside growth in the year ahead. (To watch Syth’s track record, click here.)
The Wall Street consensus on Alaska Air is clear all are on board with RJ’s Syth. The stock’s 8 recent reviews are all positive, making for a unanimous Strong Buy consensus rating. The shares are selling for $57.59 and their $82.14 average price target suggests a robust 43% one-year upside. (See Alaska Air’s stock analysis at TipRanks.)
Southwest Airlines (LUV)
And now we’ll look at the industry leader among low-cost carriers. Southwest has managed, over the years, to pull off the seemingly impossible: a reputation for both discount pricing and solid customer service. In addition, Southwest was able to keep up an enviable safety record. All of this combined to make the airline one of the industry’s long-term success stories. One statistic will tell the tale: prior to the corona crisis, Southwest posted $2.3 billion in net income for 2019, marking 47 years in a row of net profits.
In June of this year, Southwest celebrated 50 years in business. The company marked the date by unveiling a Boeing 737-800 emblazoned with the US flag and the word ‘Freedom,’ designating the aircraft as Freedom One. In a move of more interest to travelers, the company also announced a 50% off base fare sale price for three days during the anniversary week.
Like ALK above, Southwest will also release Q2 earnings today. The consensus forecast for Q2 EPS is for a net loss of 25 cents. If accurate, this will be a strong yoy improvement; the company lost $2.67 per share in the year-ago quarter.
Industry watchers will be looking carefully at the Q2 release for liquidity data. Southwest has the best balance sheet among US airlines, and finished the last calendar year with over $14.3 billion in liquid assets, against just $10.3 billion in debt. The company had $11.9 billion in cash and cash equivalents at the end of 1Q21.
Conor Cunningham covers LUV stock for MKM Partners, noting the airline’s strengths and writing, “Southwest is well positioned within the U.S. domestic market given their relative balance sheet strength, inexpensive order book, corporate opportunity, and ability to push price given their cost structure. We believe there is further upside to the shares as markets reopen and the company starts to push growth again.”
Cunningham is most impressed by the company’s solid balance sheet, seeing it as a key attractor for investors. The analyst writes of the company’s liquidity status, “Southwest is the only investment grade rated airline in the U.S. The company has navigated the pandemic from a liquidity perspective better than most. The company is in a net cash position, and that position expanded during the pandemic.”
All in all, it’s clear why Cunningham rates LUV as a Buy. His price target, at $74, indicates an upside potential of 39% for the next 12 months. (To watch Cunningham’s track record, click here.)
There are 9 recent reviews here, and they include 8 Buys against just a single Hold. The stock is trading for $53.13, and it carries a $73.29 average price target that implies a one-year upside 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 featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.