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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.

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