The U.S. Global Jets ETF (NYSEArca: JETS), the lone dedicated airline exchange traded fund, is up 13.4% year-to-date as industrial and transportation stocks rally, but JETS could be poised to offer investors even more upside in 2017.
JETS follows the U.S. Global Jets Index, which uses fundamental screens to select airline companies, with an emphasis on domestic carriers, along with global aircraft manufacturers and airport companies.
Along with lower oil prices, airline stocks look attractive in their own right. For instance, income-oriented investors may notice that airline stocks have seen improved dividend-yield growth.
Additionally, the sector shows relatively cheap valuations. Airline stocks have a 7 times price-to-earnings ratio, whereas the broader transportation stocks have a 15 times ratio and the S&P 500 index shows 17 times P/E.
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Some analysts are increasingly bullish on the prospects for airline stocks, including some of the biggest holdings in JETS.
“Our ‘Super Bull’ analysis equates to margins, earnings, and FCF that are closer to recent highs… The combination of ~25% book tax rates (along with deductible adjustments) and higher PRASM by several points is powerful, even if fuel serves as a partial offset per forwards,” according to a Morgan Stanley note posted by Ben Levisohn of Barron’s.
United Continental (NYSE: UAL), Southwest (NYSE: LUV), Delta Airlines (NYSE: DAL) and American Airlines (NASDAQ: AAL) are the four largest holdings in JETS, combining for over half the ETF’s weight.
JETS has also been rising along with oil prices, a rare scenario for airline securities.
The ability of JETS and its holdings to rise in the face of rising oil prices, usually a major headwind, is undoubtedly impressive. It is also encouraging because some market observers believe oil prices can continue climbing.
Other catalysts include, renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler, increased airline profitability, new aircraft program launches and continued demand for aircraft models and technology.
“Based on EPS upside, the Legacies American Airlines / United Continental (both OW) fare best due to lower margin profiles creating leverage to our PRASM and book tax assumptions. And from a FCF perspective, Alaska Air / Southwest Airlines (OW and EW, respectively) screen well based upon high cash tax bills and limited net operating losses, or NOLs,” according to the Morgan Stanley note seen in Barron’s.
For more information on airline ETFs, visit our Airline category.