Delta Air Lines Inc (DAL)

(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.

(A Top Pick Aug 29/13. Up 91.33%.) The industry had gone through bankruptcy, and through that process had managed to rebalance their cost structures, notably their union contracts. They all got financial discipline finally and got pricing power.

Up until two years ago the entire earnings of the industry was negative. AMR is the latest bankruptcy. Now they have consolidated. Margin is being helped by charges for checked baggage and changes.

The angle of ascent has been steep. Corrections are fairly sharp. Thinks they will continue to experience upside but not without the sharp corrections. Don’t panic too much. Look for a hook down in momentum indicators to exit.