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UBS: 6 Airline Stocks to Buy, 2 to Avoid

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- UBS Research Analyst Kevin Crissey and Associate Analyst Kevin Grasmick published a report on Jan. 3 analyzing the U.S. airline sector's performance during 2011 and concluding that it was disappointing. Although the airline sector witnessed a strong revenue growth over the last year, their final results have been dismal (excluding Alaska and Allegiant). Hence, on average, airline stocks lost 25%.

Revenue estimates for the airline sector were increased to 10% from 7%, while the estimates for growth in fuel costs were also 20% higher. Moreover, analysts believe that managements of these companies were not able to pass on the fuel price increase entirely to the consumer, generating a negative impact on the bottom-line. Given that the revenue outlook for the sector remains strong in the U.S., analysts are bullish on selected stocks like DAL and LCC.

Delta Air Lines (DAL) is UBS's top pick from the sector with a buy rating and a price target of $12 per share. Delta Airlines provides passenger and cargo air transportation services globally. It also provides services related to aircraft maintenance, repair and overhaul. Other services offered by the company include staffing services, professional security, vacation packages and aircraft charters.

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The company employs 700 aircrafts and its operations span over 357 destinations in 66 countries. Due to its strong FCF profile in 2012 and a low susceptibility to an increase in labor costs, the stock has been rated as an attractive buy by the analysts. On a forward P/E basis, the stock is trading at a hefty discount at 3.9 times earnings compared to its peer average of 9.9. However, on a 12-months trailing EV/EBITDA basis, the stock trades at a P/E of 5.3, at par with its peer average of 5.2. Ken Heebner's Capital Growth Management is very bullish about Delta. Heebner initiated a brand new $135 million position during the third quarter.

US Airways Group (LCC) has also been given a buy rating by UBS with a price target of $10 per share. Given a concentrated domestic route network, analysts foresee that outperformance in pricing will favor the company's fundamentals for 2012.

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