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number cruncher

What are we looking for?

How North American airline companies stack up.

The screen

It's still early in the current earnings season for the airlines industry but so far, results have been generally positive. In the coming weeks, the majority of airlines will release their latest quarterly results, so my colleague Lawrence Ullman and I looked for firms in the sector that could potentially have relative strength among their peers.

We used Bloomberg to list the top North American airlines with market cap above $500-million (U.S.) and the best mix of:

  • EV/EBITDAR (enterprise value divided by earnings before interest, taxes, depreciation, amortization and rental expenses – lower values are preferred);
  • forward P/E;
  • three-month consensus earnings estimate revision;
  • return on invested capital;
  • EBITDAR margin (EBITDAR as a percentage of revenue);
  • yield per passenger mile (the average amount that a passenger pays to fly one mile, expressed in U.S. cents);
  • load factor (the percentage of available capacity that was in use by revenue-generating passengers);

EBITDAR is commonly used in the airline industry to view operating results before aircraft rental and ownership costs as these costs can vary significantly among airlines.

More about the Ullman Group

The Ullman Group is an independent provider of strategic private-capital-management services to high-net-worth individuals, corporations, endowments, charities and foundations.

What we found

Since there are a limited number of airlines to choose from, we used Bloomberg to perform a back-test starting June 30, 2007, reselecting an equally weighted portfolio of the top five qualifying stocks every three months. Ten stocks are displayed in the table for expanded comparison.

Over the eight-year period, this strategy would have generated an annualized total return of 12.2 per cent (in U.S. dollars) compared with 8 per cent for the S&P 500 airlines index and 6.3 per cent for the broad S&P 500 total return index.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.

Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.

North American airline stocks