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Airline Stocks Worth the Ticket Price

Tuesday, 12 Apr 2011 02:04 PM

Market thrill-seekers need not look far for their fix: Small caps, commodities, emerging markets, they all have their crazy ups and downs. Even the broader stock market has taught buy-and-hold investors a brutal lesson in discipline during the past two years, falling by 50 percent and then rebounding sharply.

In all of this chaos, you’d have to be out of your mind to buy an airline stock, right? The oil price is over $120 a barrel, pressuring the industry already beset by weak demand in its critical business-travel segment.

Industry group IATA had forecast oil at $96 a barrel, but higher oil could squeeze profits industrywide down to 1.4 percent, it projects.

"We are constantly walking on a tightrope with very thin margins, and there is no buffer," IATA Director-General Giovanni Bisignani said at a news conference March 2, cited by Reuters. "This industry is very, very fragile."

All well and good, but two interesting airlines bear watching. As it happens, they are both Latin American-based carriers operating in two very different markets. Analysts are down a bit on them at the moment on the fuel issue, but the negativity might provide a good entry point for an investor seeking to capitalize on business growth in the region, as well as the potential for a currency kick as the dollar weakens.

What’s more, Goldman Sachs is now calling for oil to reverse, falling to $105 for Brent crude in the months ahead. If trade grows and the U.S. recovery isn't hobbled (falling oil would help), things might turn around for carriers as a group.

The first is Copa Holdings (CPA), a provider of passenger and cargo service based in Panama with operations in Colombia and in Ecuador.

Copa schedules approximately 152 flights a day. Analysts at Dahlman Rose recently downgraded Copa to hold from buy on concern about fuel costs, stating that although they expect it to “outperform the group . . . we expect the shares to decline." Not surprising, given the environment, but Copa’s return on investment is 11.73 percent with a P/E ratio of 11.07 percent. It also pays a 2 percent dividend.

The other potential is TAM (TAM), the major Brazilian carrier. It carries a current return on investment of 7.54 percent and a P/E ratio of 7.39 percent, plus a 3.7 percent dividend yield. Zacks analyst Sheetal Jalan has reiterated the firm’s neutral stance on TAM on increasing competition despite “double-digit demand growth.”

TAM has 40 domestic stops and 18 international destinations, as well as codeshare agreements with major foreign airlines flying into Brazil, including United, Lufthansa, TAP and LAN.

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Market thrill-seekers need not look far for their fix: Small caps, commodities, emerging markets, they all have their crazy ups and downs. Even the broader stock market has taught buy-and-hold investors a brutal lesson in discipline during the past two years, falling by 50...
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2011-04-12
Tuesday, 12 Apr 2011 02:04 PM
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