One way to look at the airline sector is by looking at what analysts are saying. And despite many planes still grounded, analysts are finding airline stocks to buy. In fact, there are a few that have received a “strong buy” rating.
Do the analysts know something we don’t? Not really. But analysts know that when the price movement is happening, it’s too late. So what are they seeing?
First, analysts are seeing that flights throughout the United States are increasing. Keep in mind that many airlines have been brainstorming scenarios of little to no revenue so they have a very low bar to clear to cite improvement.
And second, for the most part, airlines are doing a good job of reducing their cash burn. This has prevented a wave of airline bankruptcies.
This doesn’t mean investors should rush into airline stocks. This is still a weak industry. Business travel is largely non-existent. And quarantine rules when traveling from one state to another make leisure travel impractical.
However, there is reason to believe that air traffic will gradually get back to pre-pandemic levels when a vaccine is widely available. And if late-stage clinical trials are successful, that day may come sometime next year.
Before taking a look at three airline stocks to buy based on analyst recommendations, I’ll issue a word of caution. All bets are off if there is a widespread outbreak of Covid-19 later this fall. And since we’re still dealing with a novel virus, a new outbreak is not a possibility that can be dismissed.
But now is a time for optimism, so let’s take a look at airline stocks that look like a strong buy.
Southwest Airlines (LUV)
The first of our airline stocks to buy is Southwest for one simple reason. The company has become very good at reducing its cash burn. In the last quarter Southwest reported earnings, it had brought its average daily cash burn to $23 million. And the airline recently issued guidance that suggested investors could expect more of the same in the quarter just ended.
Southwest is already a budget airline so it should be better prepared from a pricing standpoint as traffic increases. Speaking of that the airline recently announced that it will have the majority of flights and passengers that travel through all of the regional airports around Los Angeles. In fact, according to the Los Angeles Business Journal, beginning Oct. 1, 2020, “no other airline will control as many airfields around a major metropolitan area in the United States.”
With all the good news from Southwest, I was a little perplexed by the company’s recent plea to the federal government for an extension of the CARES act. It belies this statement the company made to investors about its ability to move forward without layoffs or furloughs. “Based on the strong take rates from these voluntary programs, currently, we do not intend to pursue furloughs and layoffs, or pay and benefits cuts, through yearend”
Maybe this is just a case of standing in solidarity with its corporate brethren, but it would be something to pay attention to when the company reports earnings in October.
Alaska Air Group (ALK)
I cited Alaska Air as a stock to buy last month. And analysts agree. The airline has recently received several increased 12-month price targets from analysts. The most recent came from Barclays who bumped the stock from $37 to $40.
One of the reasons Alaska’s encouraging report on cash burn. In its last earnings report, Alaska reported it was averaging a cash burn of just $4 million a day in June. Investors will be looking to see if the company is closer to getting the cash burn to $0 by the end of the year.
Like many airlines, Alaska has kept the middle seat open and they have recently announced that initiative will continue through November. Starting in December, the airline will also be opening five new routes as part of its “sun and snow” strategy. The company is also continuing its flexible travel policy for all tickets purchased through the end of the year.
Allegiant Travel (ALGT)
Our last of the airline stocks to buy is Allegiant Travel. Allegiant is the only low-cost carrier in the group. The airline has benefited from a business model in which the company flexes plane capacity to meet seasonal demand levels.
But a better question for investors is whether the airline is ready for its close up. Allegiant is the somewhat surprising sponsor for the new professional football stadium in Las Vegas. And the stadium will be showcased throughout the NFL season. It started on Sept. 21, 2020, when the Las Vegas Raiders hosted the New Orleans Saints.
Allegiant paid $25 million per year (in cash and kind) for at least 20 years (some reports say 30 years) of naming rights. I’ve noticed several friends have already been to Las Vegas and I imagine the city will be a draw for NFL fans when their favorite team is paying the Raiders a visit. And Allegiant is obviously hoping to become the preferred airline of choice for the team’s loyal fan base that still lives in Oakland.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.