What are we looking for?
Given the positive outlook from analysts, a healthier industry and a downward slide in oil prices – we decided to search for the best, economically strong airlines.
The screen
We searched for airline stocks in North America with a minimum market cap of $500-million and looked at the following metrics:
– An economic performance index, or EPI, (return on capital divided by the cost of capital) of one or more. EPI helps us find companies that create the highest economic profit and wealth creation for investors;
– We displayed the return on capital and cost of capital for each company for readers to view;
– Future growth value divided by market value of total capital (FGV/MV), a ratio that helps determine whether the stock is trading at a discount or premium to its growth. A negative FGV/MV indicates a current market value that is lower than the current value of the company's operations;
– Market value added divided by market value (MVA/MV), a ratio that helps determine whether the invested capital is working properly. The market value-added is the difference between the market value of a company and the capital that was invested in it. Normally, this number should be positive for an investment to be considered.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
Five companies (Delta Air Lines Inc., Allegiant Travel Co., WestJet Airlines Ltd., Alaska Air Group Inc. and Copa Holdings S.A.) stand out from the group based on their economic performance. With the exception of Delta Air, they are all smaller airlines generating a return on capital greater than 13 per cent. The remaining airlines on our list have an EPI below 1.7 and a return on capital lower than 11.5 per cent.
Smaller airlines in the second group also tend to trade at a discount to their growth.
Two of the three Canadian stocks that made this part of the list, Air Canada and Chorus Aviation Inc., have a negative FGV/MV.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Michael Cloherty is senior account manager for StockPointer at Inovestor Inc.