The airline industry and related exchange traded fund were soaring as bargain hunters help put a little more wind under the sector’s wings.
The U.S. Global Jets ETF (NYSEArca: JETS) gained 2.8% Wednesday. Over the past week, JETS rose 2.5%.
The airline stocks were higher Wednesday as investors jumped on the cheaper valuations after the recent market sell-off. Deustche Bank upgraded its outlook on American Airlines (NYSE: AAL) and Delta Airlines (NYSE: DAL), citing attractive valuations and optimism over the recent dip in energy prices, MarketWatch reported.
According to Deutsche Bank’s Michael Linenberg, major airline stocks are trading near 9.4 times earnings per share estimates for 2015 and 9.0 times EPS estimates for 2016, or below their historical range of 10 times to 12 times EPS estimates, reports Ben Levisohn for Barron’s.
JETS is currently trading at a 8.15 price-to-earnings, according to Morningstar data. In contrast, the S&P 500 shows a 18.3 P/E ratio.
The analyst attributed the recent weakness in the space to passenger revenue per available seat mile projections, unresolved labor contracts and government investigations.
“However, those issues will not prevent the US airlines from moving up the investor suitability curve as long as they continue to implement pro-shareholder initiatives such as share repurchases, dividend declarations, and pay down debt,” Linenberg said. “Furthermore, airline credit profiles continue to improve and they are getting more respect from the market”
For instance, United Continental (NYSE: UAL) will join the S&P 500 effective September 2, replacing Hospira (NYSE: HSP), after the close, according to a press release.
Consequently, Deutsche Bank has raised AAL and DAL to Buy from Hold, “as we think at current levels they represent an attractive entry-point compared to our 12 month price targets.”
Looking ahead, Deutsche Bank believes that energy prices will continue to play a role on the airline industry outlook.
“If sustained, could spell upside for EPS estimates,” Linenberg added.
Oil prices have jumped over 20% in the past week but dipped on Tuesday. Given the current swing, Linenberg argues that any micro and macro concerns have been “more than fully discounted in [airline]share prices.”
U.S. Global Jets ETF
For more information on the airline industry, visit our airlines category.
Max Chen contributed to this article.