The airline industry is set to build on 2023’s performance by capitalizing on the solid travel demand. Both leisure and business travel will likely witness high demand this year. Therefore, it could be wise to add fundamentally strong airline stocks Copa Holdings, S.A. (CPA), Gol Linhas Aéreas Inteligentes S.A. (GOL), and Cathay Pacific Airways Limited (CPCAY) to one’s watchlist.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s happening in the airline industry.
The airline industry rebounded strongly from pandemic restrictions, fueled by pent-up demand for travel. The industry continued its recovery through last year, with international arrivals reaching 85% of pre-pandemic levels in the second quarter of 2023 and 90% in July.
World Travel & Tourism Council’s (WTTC) Senior VP of Advocacy and Communications Virginia Messina said, “International arrivals are higher than 2022 in all regions across the world and we expect this trend to continue in 2024, with many regions surpassing 2019 levels by the end of [the] year.”
IATA reported that the passenger demand recovery persisted in October, with total global traffic reaching 98.2% of pre-COVID levels, marking a 31.2% year-over-year increase. International traffic in October climbed 29.7% over the prior-year quarter, and international revenue passenger kilometers (RPKs) reached 94.4% of October 2019 levels.
This year, IATA forecasts the airline industry's net profit to reach $25.7 billion (2.7% net profit margin), a slight improvement over 2023, which is expected to show a $23.3 billion net profit (2.6% net profit margin). The industry’s operating profits are expected to reach $49.30 billion in 2024, and total revenues are expected to grow 7.6% year-over-year to a record $964 billion.
The IATA forecasts that 4.7 billion people will travel in 2024, exceeding the pre-pandemic level of 4.5 billion in 2019. IATA Director General Willie Walsh said, “The speed of recovery has been extraordinary, yet it also appears that the pandemic has cost aviation about four years of growth. From 2024, the outlook indicates that we can expect more normal growth patterns for both passenger and cargo.”
Investors’ interest in the sector is evident from the U.S. Global Jets ETF's (JETS) 9.9% returns over the past three months.
Considering these conducive trends, let’s analyze the fundamentals of the three stocks from the Airlines industry worth adding to one’s watchlist, beginning with the third choice.
Stock #3: Copa Holdings, S.A. (CPA)
CPA provides airline passenger and cargo services. It is based in Panama City, Panama. The company offers approximately 327 daily scheduled flights to 78 destinations in 32 countries in North, Central, South America, and the Caribbean.
In terms of its trailing-12-month gross profit margin, CPA’s 42.87% is 41.6% higher than the 30.28% industry average. Its 23.66% trailing-12-month EBIT margin is 141.2% higher than the 9.81% industry average. However, its 0.71x trailing-12-month asset turnover ratio is 11% lower than the industry average of 0.80x.
CPA’s revenue passenger miles for the third quarter ended September 30, 2023, increased 13.3% sequentially to 6.24 billion. Its adjusted net profit and adjusted EPS rose 51.6% and 51% year-over-year to $174.40 million and $4.39, respectively.
Also, as of September 2023, the company’s cash and cash equivalents came in at $236.88 million, compared to cash and cash equivalents of $122.42 million for the fiscal year ended December 31, 2022.
Analysts expect CPA’s EPS and revenue for the quarter ending March 31, 2024, to increase 4.5% and 3.8% year-over-year to $4.17 and $899.76 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 12% to close the last trading session at $100.01.
CPA’s POWR Ratings reflect an uncertain outlook. It has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #8 out of 28 stocks in the Airlines industry. It has a C grade for Growth, Value, Momentum, and Stability. Click here to access CPA’s grades for Sentiment and Quality.
Stock #2: Gol Linhas Aéreas Inteligentes S.A. (GOL)
Headquartered in Sao Paulo, Brazil, GOL provides scheduled and non-scheduled air transportation services for passengers and cargo, along with aircraft maintenance services.
In terms of its trailing-12-month EBIT margin, GOL’s 13.34% is 36% higher than the 9.81% industry average. Its 3.17% trailing-12-month Capex/Sales is 6.7% higher than the 2.97% industry average. However, its 29.03% trailing-12-month gross profit margin is 4.1% lower than the industry average of 30.28%.
For the third quarter ended September 30, 2023, GOL’s net operating revenue increased 16.4% year-over-year to R$4.67 billion ($948.47 million). Its operating income rose significantly over the year-ago quarter to R$825.10 million ($167.58 million). Also, its recurring EBITDA rose 79.8% year-over-year to R$1.25 billion ($ 253.87 million).
Street expects GOL’s revenue for the quarter ended December 31, 2023, to increase 12.1% year-over-year to $1.03 billion. On the other hand, its EPS for the quarter ending March 31, 2024, is expected to decrease 13.3% year-over-year to $0.11. Over the past three months, the stock has gained 33.5% to close the last trading session at $3.27.
GOL’s POWR Ratings reflect its bleak prospects. It has an overall rating of C, which translates to a Neutral in our proprietary rating system.
It is ranked #7 in the same industry. It has a C grade for Growth, Momentum, and Stability. Click here to see the other ratings of GOL for Value, Sentiment, and Quality.
Stock #1: Cathay Pacific Airways Limited (CPCAY)
Headquartered in Lantau Island, Hong Kong, CPCAY and its subsidiaries operate as carriers of international passengers and air cargo. The company conducts airline operations primarily to and from Hong Kong. Additionally, it offers property investment, travel rewards, financial services, aircraft leasing, airline catering, and ground handling.
In terms of the trailing-12-month levered FCF margin, CPCAY’s 38.59% is 545.1% higher than the 5.98% industry average. Likewise, its 5.71% trailing-12-month Capex/Sales is 92.1% higher than the industry average of 2.97%. In addition, the stock’s 39.82% trailing-12-month gross profit margin is 31.5% higher than the industry average of 30.28%.
CPCAY’s total revenue for the six months that ended June 30, 2023, rose 135% year-over-year to HK$43.59 billion ($5.58 billion). Its operating profit came in at HK$8.77 billion ($1.12 billion), compared to an operating loss of HK$1.25 billion ($160 million) in the year-ago quarter.
For the same period, its profit attributable to the shareholders of CPCAY and earnings per ordinary share came in at HK$4.27 billion ($546.56 million) and HK$55.2, compared to a loss of HK$5 billion ($640.20 million) and loss per share of HK$82.3, respectively.
For the fiscal year ended December 31, 2023, DAL’s revenue is expected to increase 84.5% year-over-year to $11.99 billion. Over the past nine months, the stock has gained 5.9% to close the last trading session at $5.17.
CPCAY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and a B for Stability and Quality. Within the Airlines industry, it is ranked first. In total, we rate CPCAY on eight different levels. Beyond what we stated above, we also have given CPCAY grades for Value, Momentum, and Sentiment. Get all the CPCAY ratings here.
What To Do Next?
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CPCAY shares were unchanged in premarket trading Thursday. Year-to-date, CPCAY has declined -0.39%, versus a -1.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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