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Airlines’ Relative Valuations after 4Q16 Earnings: What Is Priced In?

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Nov. 20 2020, Updated 12:48 p.m. ET

EV-to-EBITDA multiple

Airlines are capital-intensive businesses, with high levels of depreciation and amortization as well as varying degrees of debt and operating leases. To neutralize these factors, we use the EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] ratio to value airline stocks.

The forward EV-to-EBITDA ratio shows what investors are willing to pay for the next four quarters of estimated EBITDA.

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Current valuations

Alaska Air Group (ALK) currently has the highest forward EV-to-EBITDA multiple of 6.6x. American Airlines (AAL) has a multiple of 6.5x, while Southwest Airlines (LUV) has a multiple of 6.3x.

Spirit Airlines (SAVE) is valued at 6.0x, and United Continental (UAL) is valued at 5.9x. JetBlue Airways (JBLU) and Delta Air Lines (DAL) are valued at EV-to-EBITDA multiples of 5.6x and 5.3x, respectively.

The market expects DAL to record EBITDA growth of 8.2% in the next year. In the next year, AAL’s EBITDA is expected to fall 5%, UAL’s EBITDA is expected to fall 8%, and SAVE’s EBITDA is expected to fall 3%.

In the next year, ALK’s EBITDA is expected to grow 6%, LUV’s EBITDA is expected to grow 1%, and JBLU’s EBITDA is expected to grow 8%.

Our analysis

Valuation multiples depend on how risky investors seem to think a particular stock is and what they’re willing to pay for it. For example, 2011 and 2012 saw global bear markets due to high inflation in Europe and weakness in emerging markets. The airline industry’s valuation was also at historic lows during this timeframe.

To assess the riskiness of investing in airline stocks, investors should track key indicators. Some company-specific metrics include expected future EBITDA growth, high leverage, and future margins, especially as some analysts believe that airline margins have peaked.

Investors should also keep an eye on the airline industry, as industry fundamentals also impact each company’s valuation multiple.

Investors can gain exposure to the industry through the iShares Transportation Average ETF (IYT), which invests 23% of its portfolio in airlines. For ongoing industry-specific updates, please visit Market Realist’s Airlines page.

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