Is This Airline Flying High Enough to Buy?

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With shares of US Airways Group (NYSE:LCC) trading around $13.02, is LCC a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

US Airways posted third-quarter 2012 results on October 24 that came in ahead of expectations. Revenue rose 2.8 percent to $3.53 billion from the quarter in 2011. Net income rose to $1.24 per share, from just $0.41 in the quarter a year ago. EPS was $0.98 per share adjusted for special items.

Despite cancelling nearly 4,200 flights because of hurricane Sandy, the airline posted a 3 percent gain in revenue passenger miles for October 2012 compared to the month in 2011. Available seat miles remained flat for the month.

The company has said that it will provide an estimate of the financial impact of hurricane Sandy in its November traffic release.

E = Debt to Equity Ratio is Close to Zero

US Airways has a debt-to-equity ratio of 6.02, which looks horrendous in one light, and not so bad in another. When compared to United Continental (NYSE:UAL), which sits at a debt-to-equity ratio of 6.7, US Airways is edging out the competition. When compared to Southwest Airlines (NYSE:LUV), which has a debt-to-equity ratio of 0.46, US Airways appears crushed by debt. This is in large part thanks to its multiple bailouts, which Southwest managed to doge.

It’s also important to consider total debt and total cash on hand. US Airways has $2.19 billion in total cash, and $4.44 billion in total debt. United Continental has $6.68 billion in total cash, and $12.24 billion in total debt, while Southwest Airlines has $3.78 billion in total cash, and $3.31 billion in total debt.

T = Technicals on the Stock Chart are StrongUS Airways Airplanes

As of November 7, 2012, the stock price is 7.2 percent above its 20-day simple moving average, or SMA; 12.18 percent above its 50-day SMA, and 22.37 percent above its 200-day SMA.

Since the beginning of 2012, the stock price has been in a dramatically upward trend, gaining 154.10 percent this year to date, and 149.71 percent year over year.

E = Earnings are Increasing Quarter over Quarter

US Airways has posted increasing revenue every year since coming out of the financial crisis. While earnings for 2011 came in weak, analysts are expecting 2.64 for 2012, and 3.08 for 2013, with revenue similarly trekking higher. Full-year 2012 revenue is expected at $13.82 billion, and 2013 revenue is expected at $14.39 billion.

2007 2008 2009 2010 2011
Revenue ($) in millions 11,700 12,118 10,458 11,908 13,055
Diluted EPS ($) 4.52 (22.06) (1.54) 2.61 0.43

(Fiscal year is January-December.)

While earnings dropped slightly in the most recent quarter, the last two quarters have been strong. The downside is that analysts are expecting a weak fourth quarter, with estimates coming in at only $0.11 per share. First-quarter FY 2013 estimates are even worse, at $-0.03. But keep in mind that the full-year estimates remain strong.

Sept. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 June 30, 2012 Sept. 30, 2012
Revenue ($) in millions 3,436 3,155 3,266 3,754 3,533
Diluted EPS ($) 0.38 0.11 0.28 1.50 1.24

T = Trends Support the Industry in which the Company OperatesUS Airways Plane

The past couple of years have not necessarily been kind to airlines. Multiple airlines have filed for multiple bankruptcies and had multiple bailouts. Memories of an industry on the brink of collapse are not far off. Airlines across the board have cut costs and hiked prices in order to return to profitability.

In the most recent quarter, a general decrease in fuel prices helped earnings, and many analysts think that the trend will continue. U.S. oil reserves and production are at a 17-year high.

Perhaps most promising, particularly for US Airways, is that revenue passenger miles are up, and have been increasing for the last two years.

Conclusion

A large part of the argument surrounding US Airways involves the company’s actual value versus its current market value. The company has more cash and higher quarterly revenue than its market cap: $2.24 billion in cash, $3.53 billion third-quarter revenue, $2.11 billion market cap.

The sore spot on the books is $4.56 billion in debt, but with a long-term debt-to-equity ratio of 5.47, most of the company’s debt is not coming due anytime soon.

Supporting some of the interest in the stock this year has been merger talks between US Airways and American Airlines, a subsidiary of AMR Corp (AAMRQ.PK). American Airlines management seems reluctant to go through with a deal, but US Airways is backed by the Allied Pilots Association in its determination to move forward.

Because of this, and the metrics above, US Airways is an OUTPERFORM. It’s hard to believe that this stock is not undervalued at its current price. However, analysts are predicting a bad fourth-quarter for earnings, with an average estimate of only $0.11 per share.

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