This year so far hasn’t gone well for the entire airline (IYT) industry. Almost every air carrier has registered a decline in its share price, with a few exceptions—such as United Continental (UAL), which has risen 37.8% year-to-date or YTD.
Despite this remarkable gain, shares of United Continental still trade at an attractive valuation multiple. Based on trailing-12-months earnings, United Continental has a PE multiple of 11.34x. Peers Southwest Airlines (LUV) and Spirit Airlines (SAVE) have trailing-12-month PE ratios of 13.54x and 13.56x, respectively.
Credit Suisse’s (CS) second pick, Delta Airlines (DAL), has the second-lowest PE multiple among the top four US airlines. The stock has a PE multiple of 10.56x, which follows American Airlines’ (AAL) 8.14x. Moreover, Credit Suisse’s top pick, Alaska Air Group (ALK), has the highest PE multiple at 15.09x.
Given Wall Street’s next-12-month earnings expectations, American Airlines’, United Continental’s, Delta Air Lines’, Southwest Airlines’, Spirit Airlines’, and Alaska Airlines’ PE ratios stand at 6.93x, 9.31x, 8.86x, 11.35x, 11.26x, and 12.71x, respectively.
Relying entirely on PE may not always the best way to determine a company’s performance due to the multiple’s various limitations. The PE multiple doesn’t focus on long-term earnings, doesn’t reflect a company’s debt, and doesn’t reflect the quality of a company’s earnings. So it’s better to examine other valuation indicators, such as the EV-to-EBITDA (enterprise value-to-EBITDA) multiple, which accommodates the limitations of the PE ratio.
The EV-to-EBITDA ratio is considered the best multiple for comparing airline stocks. At current market prices, American Airlines, United Continental, Delta Airlines, Southwest Airlines, Spirit Airlines, and Alaska Airlines have EV-to-EBITDA multiples of 6.37x, 6.00x, 5.88x, 6.75x, 7.94x, and 7.33x, respectively.
Given Wall Street’s next 12-month EBITDA expectations, American Airlines, United Continental, Delta Air Lines, Southwest Airlines, Spirit Airlines, and Alaska Airlines have forward ratios of 5.24x, 5.22x, 5.42x, 6.23x, 5.23x, and 6.48x, respectively.