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Connecting the Dots: Airlines: The Biggest Winner from Cheap Oil

 -- Published: Thursday, 26 February 2015 | Print  | Disqus 

By Tony Sagami 

Iíve devoted several recent issues to the brick wall of trouble oil producers and oil services stocks are headed for. No question that falling oil prices are going to crush the profits for the entire food chain of oil.

However, businesses that consume large amounts of oil are going to enjoy shrinking production costs and big profits a quarter or two down the road.

The list of winners from lower oil prices has some obvious winners, such as airlines.

A typical airline spends 34% of its operating expenses on jet fuel, so the steep drop in oil prices will translate into millions of additional profits. 2015 will be a very good year for the airlines.

Thatís not new news, and airline stocks have already rallied, but one airline has flown under the radar (excuse the pun) and is a bargain compared to the earnings growth that I expect it to deliver.

That airline is Panama-based Copa Holdings, which specializes in Central and South America with 325 daily flights to 29 countries in North, Central, and South America. Copa Holdings offers city-to-city flights that none of its competitors does.

The Latin American market is one of the fastest-growing airline markets in the world, and Copa Holdings is one of the prime beneficiaries of that growth. In fact, in the most recent period (November 2014), Copa Holdings reported a 9.9% year-over-year increase in passenger traffic.

Get this: in 2014, Copa Airlines burned through 268.5 million gallons of jet fuel at a cost of $820.7 million. With oil prices down by more than 50%, it isnít hard to figure out that Copa Airlines is going to save a lot of money in 2015.

Rising traffic + lower fuel costs = big 2015 profits.

Despite those positive tailwinds, Copa shares are trading at only 11 times earnings, which is dirt cheap compared to other airline stocks.

  • JetBlue Airways                         14.1 times earnings
  • United Continental Holdings         22.7 times earnings
  • Southwest Airlines                     26.6 times earnings
  • Delta Airlines                             58.0 times earnings

Moreover, Copa Airlines has $763 million or $17.22 per share in cash in the bank and pays a $3.84 annual dividend, which translates to close to a 3.4% yield. The next quarterly dividend is scheduled to be paid in early March.

Iím not suggesting that you rush out and buy Copa Airlines tomorrow morning. As always, timing is everything, and to be fair, I need to disclose that Copa Airlines was recommended to my Just One Trade subscribers on January 6 when it traded at $100 a share.

If youíre more of an ETF-type of investor, US Global Investors will soon offer an airline ETF, which will mirror the US Global Jets Index. The fund is expected to launch in March and will trade under the name US Global Jets ETF, symbol JETS.

Tony Sagami
Tony Sagami

30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

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 -- Published: Thursday, 26 February 2015 | E-Mail  | Print  | Source:

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