Transportation

3 Top Airline Stocks to Buy Now as Jet Fuel Prices Continue Plunge

For the top airlines, when jet fuel prices plunge the money that is saved starts going straight to the bottom line, and with oil prices down almost 60% over the past year and airline miles being flown up solidly, it’s a pretty good bet that some of the top airlines will post very solid third-quarter numbers.

In a recent Cowen research report, well-respected airlines analyst Helane Becker and her team continue to believe valuations for the airlines remain very compelling. They also point out that if valuations don’t improve and fundamentals remain pretty much the same, they expect the airlines to aggressively repurchase shares. That would be extremely bullish as well. The Cowen report contains five stocks that are rated Outperform, but we focus on three with perhaps the best potential upside.

Southwest Airlines

This company continues to expand routes and remains a low-cost leader. It is also the top pick at Cowen. Southwest Airlines Inc. (NYSE: LUV) continues to increase the footprint and brand awareness all over the country. With the domestic market showing reasonably good strength, and the pricing environment looking very solid for the rest of 2015, revenues should stay strong and continue to grow. Jet fuel prices, which still remain much lower than in past years, is almost 30% of Southwest’s total costs and have been a key for improving revenues and earnings. With almost no international business at this time, currency headwinds are not an issue for the airline.

CEO Gary Kelly recently said when interviewed earlier this year “Our available seat-mile growth will be a little bit more than our seat growth, but it will be around 7 percent for this year; and likewise we will manage aggressively to the low end of that range for next year. Much of the growth in 2016 is simply carryover from 2015.” This has been a concern for some investors and probably relieves some anxiety of overcapacity.

Southwest shareholders are paid a 0.8% dividend. The Cowen price target for the stock is $50, and the Thomson/First Call consensus target is slightly higher at $51.07. The stock closed most recently at $37.45.

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