Delta Air Lines Inc (DAL)

Doesn't own any airlines right now. Had looked at Air Canada (AC-T) which had an incredible year last year. You could come up with a million and one issues of why you would never want to own an airline, but at the same time you could make an argument that you are in the sweet spot of a cycle for the airlines.

The stock took a hit. She likes it because she is seeing better cash flow than their peers. They really have some exceptional free cash flow yields. They are able to increase their margins. (Analysts’ target: $63.00).

Transportation stocks have had a kind of bumpy last few months, and have pulled back down, so are more attractive on a valuation perspective. He generally likes airlines. The business has been rationalized as they have "whittled down" to a large handful of players. They seem to be competing less on price, therefore respecting one another’s margins. Labour, etc. seems to have been put in the background. With global economy improving, they are able to keep prices high. This has a PE of less than 10.

The US airlines have fundamentally transformed themselves. They used to be carefree and footloose with funds. Over the last 4 years they have consolidated, and there are now only 4 major carriers, and have been enormously profitable. This is buying back stock hand over fist. Raised its dividend, and announced a 50% dividend increase for the next quarter. Trading at about 9X earnings. Dividend yield of 1.5%. (Analysts’ price target is $66.)

Chart shows this is retesting old highs, and that is always bullish.

It is another one she likes. They have not been able to add margins, but they were able to add flights so they have one of the better valuations. See Top Picks today.

Doesn’t own any airline stocks. Typically, when airlines start to make enough money, they get into labour issues and have to increase capacity to deal with that. They’ve had a wonderful run and are wonderful trading vehicles, but there’s too much volatility for him.

Boeing (BA-N) or Delta (DAL-N)? This just rebounded off a beautiful price low at 2X Book. The stock is cheap. Its FMV is 85% higher than the current price. He would buy this and forget Boeing.

(A Top Pick Dec 16/15. Down 5.42%.) A superior operator in terms of an airline, and it has bounced all over the map. Reduced some of his exposure, but of the legacy carriers, this is best of breed. Really good cost control. Higher margins than others. Thinks better times are ahead for the airline industry.

(Market Call Minute.) Airlines look great.

US has typically had a problem with capacity, so as the economy picks up, all the airlines come out with new planes, brings on too much capacity, and essentially over saturates the market, so margins collapse. Exactly the opposite is happening this cycle. They have been extremely disciplined. As one of the original legacy carriers, this is a very strong name that have cut costs down, has very strong margins with a powerful tailwind of lower fuel prices. Trading at roughly 9X next year’s earnings, so it is extremely cheap.

This airline seems to be performing very well. Have had a lot of cost cuts and significant earnings leverage. Air Canada (AC-T) trades at a big discount to a company like this, and he would favour it over the US airlines. (See Top Picks.)

About 2/3rds hedged in oil that ends at the end of this year. They have not massively added to supply which has been the killer for the industry.

PE ratio of about 10X, which is cheaper than some of the other airlines. All of the airlines are benefiting from the US industry consolidation. This gives them pricing power, such as checked bags charges, etc. Even at 10X, it is still an attractive industry, but he doesn't think this would be his 1st choice. His preference would be United Airlines (UAL-N), which he feels is a better run business and one you can count on doing better over the next 2-3 years.

He is not too fond of airlines in general. However, this one got a bit of good news today in that their bonds are gaining on the credit side in terms of their rating. Airlines typically are high fixed costs, so in times of trouble they don’t do well. However, all of them seem to have been doing well. If you do see a correction, airline stocks will come off quickly.