J-E-T-S, Jets, Jets, Jets
By Kristi Henderson, CPA/PFS, Madrona Financial Services and Co-Portfolio Manager of the AdvisorShares Madrona ETFs (FWDB, FWDD, FWDI)
If you think the airline industry is struggling due to decreased airfare costs, think again. Although ticket costs have recently declined, you’ve probably noticed that the industry has found other ways to raid your pockets. They’re profiting from the combination of booked flights with passengers that are willing to pay for internet, video consoles, movies, and even additional leg room. While customers continue to spend more money for these luxuries, the airline earnings and growth projections look healthier than the rest of the stock market.
Let’s take a closer look at the analyst projections of the industry, which are largely derived from the recent decline in fuel prices and anticipated record high load factors. The forward looking price to earnings ratio about 10, meaning analysts expect investors will earn $1 for every $10 invested over the next year. Compare that to the average P/E ratio of the stock market, which is currently around 16. While the industry’s earnings projections are fairly consistent with the market, the annual growth projections are astonishingly superior. Analysts project the airline industry earnings to grow over 20% per year for the next five years. I’ll take that over the 10.8% average expected growth of the general market.
When analyzing the projected growth and earnings relative to the average price of the airline stocks, it appears to be a promising industry for investors. Over 30% of the common airline stocks have a forward PEG below 0.5. These projections indicate that you might want to get your boarding pass!