Personal Finance > Investing
Shocker: There's value in airlines
graphic February 8, 2002: 6:23 p.m. ET

All the key metrics are pointing down -- but there's plenty of room on the upside.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - We interrupt this regularly scheduled programming of "Who's the Next Enron?" to remind investors that plenty of sectors already have had the snot beaten out of them -- only some of them (unlike Enron) might actually be ripe for an investment.

Unpopular segment of the past two years by far: Airlines. That's why it's a fair bet that a basket of airline stocks promises to have a nice rise from here.

Pick a chart -- any chart -- in the airline industry, and the image is hideous. The American Stock Exchange Airline index fell off a cliff after Sept. 11 and even after a recovery is down 48 percent from where it began 2000. (See a list of leading airline stocks here.)

The airlines have had everything going against them: Declining passenger levels, catastrophic accidents, an ailing economy, overcapacity and more. The point here isn't to say that airlines are the country's best possible companies. It's to say that despite mid-September fears, Americans are continuing to fly and these stocks will once again come back.

Already, the airline stocks have been good trades. Salomon Smith Barney airline analyst Brian Harris points out in comments to clients this week that airline stocks under-performed the S&P 500 index by 2 percentage points in October -- when the beginning of U.S. bombing in Afghanistan renewed air-travel concerns -- and then outpaced the broader market by 23 percent in November.

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    "The industry recovery will not be straight line, but overall should continue to plug along as acute terrorism fears recede and the economy begins to pick up," says Harris, who favors shares of Continental Airlines (CAL: up $1.25 to $28.60, Research, Estimates), Northwest Airlines (NWAC: up $0.39 to $14.73, Research, Estimates), AMR (AMR: up $0.72 to $23.65, Research, Estimates) (parent of American Airlines), and United Airlines parent UAL (UAL: up $0.66 to $12.30, Research, Estimates).

    There's an even more compelling argument. Any industry that goes through a tough time inevitably goes through a period of easy comparisons, that is, when the current environment, no matter how lousy, looks better than the year before. "While January is no great shakes," argues Harris, "sequential year-over-year revenue improvement is likely to resume in February and continue for every month through the third quarter of 2002."

    One might suggest that this argument ought to apply to the technology industry as well, of course. The difference is that tech leaders like Cisco continue to trade for giant valuations. Airlines as a group, however, are worth less than 0.2 times sales, according to Harris. (Your average plodding-yet-profitable company trades at about 1.0 times sales.) Even the whiff of profitability would send these stocks up to far more respectable valuations.

    Plenty can go wrong with airline stocks, not the least of which would be another large-scale terrorist act. But business travelers are taking to the skies again, there haven't been any additional accidents, many expect a second-half economic rebound and flight eliminations have helped the industry's capacity issues.

    We now bring you back to your previously scheduled programming...

    From the mailbag: What's exciting?

    A gaggle of gizmo lovers inveighed against my suggestion here Wednesday that Cisco products -- switches and routers -- don't exactly make the average investor's blood boil.

    A representative sample: "Do you realize that, without switches and routers, the Internet could not exist? That alone, makes them quite exciting and necessary."

    No argument. But without cement and iron rods buildings couldn't be built, and investors aren't exactly jumping for joy looking for opportunities to own dump-truck companies.

    Investors like two kinds of stories: Companies they love because they use the products or shop at their stores (Wal-Mart come to mind) and companies whose growth is explosive (Cisco fit that bill for a decade). Switches and routers were all that when they made Cisco go vroom. Now they're back to being the building blocks for a maturing industry. Now, about US Concrete...

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