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Airline Stock Valuations: What’s Priced In?

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Aug. 31 2017, Updated 9:36 a.m. ET

Current valuation

Currently, both Alaska Air (ALK) and Southwest Airlines (LUV) are trading at industry-leading valuations of 6.8x their forward EV/EBITDA multiples. American Airlines (AAL) is trading at a valuation of 6.3x. Both Delta Air Lines (DAL) and Spirit Airlines (SAVE) are trading at a valuation of 5.8x their forward EV/EBITDA ratios. JetBlue Airways (JBLU) is trading at a multiple of 5.7x, and United Continental (UAL) is trading at a multiple of 5.1x.

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Analysts are expecting AAL’s EBITDA to fall 1.1%, DAL’s 4.3%, and UAL’s 9.0%. Niche player ALK’s EBITDA is expected to grow at 14.5%. However, this growth is mostly inorganic. Regional players Southwest’s EBITDA is also expected to fall -3.3%, while JBLU’s EBITDA is expected to fall 7.5%. Spirit Airlines is the only carrier expected to record 9.9% EBITDA growth.

Our analysis

In the short term, airlines’ ability to maintain costs and improve unit revenues and margins should impact valuations.

In the long term, however, industry economics should play an important role. Fears of overcapacity in the industry and fuel price rise increases already seem to be concerning investors. If fuel costs rise and airlines are unable to pass on these costs to their customers, profitability should decline. This decline would adversely affect valuations.

On the other hand, improving global travel and economic outlook would be huge positives. Investors should watch out for those signs by following our airline industry insights.

Investors can gain exposure to the industry through the PowerShares Dynamic Leisure & Entertainment ETF (PEJ), which invests 19.2% of its portfolio in airlines.

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