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.

Follow TheStreet on Twitter and become a fan on Facebook.

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.

The US Airways Group, through its subsidiaries, provides air transportation for passengers and cargo with 3,200 flights daily to 200 destinations worldwide. The Company operates through a fleet of 339 mainline jets along with its regional airline subsidiaries, adding another 231 regional jets and 50 turboprops to the total fleet size. On a forward P/E and a 12-month trailing EV/EBITDA basis, the stock is trading at a hefty discount of 3.7 and 4.7 times earnings compared to its peer average of 9.9 and 5.2 respectively. Moreover, the stock is also trading cheap at 4 times the P/FCF basis compared to its regional peer average of 10 times. Billionaire David Tepper had $51 million in US Airways. He trimmed his positions in DAL and LCC during the third quarter.

Alaska Air Group ( ALK) has also been given a buy rating by UBS with a price target of $81.0 per share. Alaska, through its subsidiaries, Alaska Airlines and Horizon Air operates as an airline company serving 23 million passengers, and offering mail and freight services. Its destinations are concentrated in the western U.S., Canada, and Mexico. The company's subsidiary Alaska Airlines operates a fleet of 114 jet aircrafts, while Horizon Air Industries operates a fleet of 13 jets and 41 turboprop aircrafts. On a forward P/E and a 12-month trailing EV/EBITDA basis, the stock is trading at a hefty discount at 7.7 and 3.0 times earnings compared to its peer average of 9.9 and 5.2 respectively. Moreover, the stock is also trading cheap at 6.1 times the P/FCF basis compared to its regional peer average of 10. Jim Simons' Renaissance Technologies had the largest stake in ALK among the 350-plus hedge funds we are tracking.

JetBlue Airways ( JBLU) has been given a neutral rating by UBS and a price target of $5.0 per share. JetBlue Airways provides passenger air transportation services through 650 flights on daily basis with 63 destinations in 21 states and 10 countries in the Caribbean and Latin America. The company operates a fleet of 115 Airbus A320 aircrafts and 45 Embraer 190 aircrafts. Other services offered through the company's subsidiaries include in-flight entertainment, voice communication, and data connectivity systems for commercial and general aviation aircrafts. On a forward P/E and a 12-month trailing EV/EBITDA basis, the stock is trading slightly expensive at 11.1 and 5.7 times compared to its peer average of 9.9 and 5.2 times respectively. However, the stock is trading cheap at 6.7 times the P/FCF basis compared to its regional peer average of 10. Robert Millard's Realm Partners sold out its $14 million position in JBLU during the third quarter.

Southwest Airlines ( LUV) has been given a neutral rating by UBS with a price target of $9.5 per share. Southwest Airlines operates as a passenger transportation airline in the U.S. The company has 548 Boeing 737 aircrafts and provides transportation to 69 cities in 35 states. The company also sells frequent flyer credits and related services to companies participating in its Rapid Rewards frequent flyer program. The stock is trading slightly expensive at 11 times the forward P/E ratio as compared to its peer average of 9.9. However on the basis of a 12-months trailing EV/EBITDA, the stock is trading at a discount at 4.5 times compared to its peer average of 5.2. It also trades cheap at 1 times the price-to-book-value. The stock offers a small dividend yield as compared to its regional peers offering no dividends. Bill Miller's Legg Mason is among Southwest investors.

United Continental ( UAL) has been given a buy rating by UBS and a price target of $35 per share. United Continental offers passenger and cargo air transportation services. The company operates a total of 5,675 flights in a day to 372 destinations worldwide. The stock trades extremely cheap on valuations. On a forward P/E basis, a 12-months trailing EV/EBITDA basis and a P/FCF basis, the stock is trading at 3.5, 2.9 and 4.0 times compared to its peer average of 9.9, 5.2 and 10 respectively. John Griffin's Blue Ridge Capital cut its stake in UAL by 54% during the third quarter.

Allegiant Travel ( ALGT) has been given a buy rating by UBS with a price target of $61 per share. The company, through its subsidiaries, operates as a leisure travel company in the U.S. It operates a fleet of 51 MD-80 aircrafts and 1 Boeing 757-200 aircraft, and also owns and leases 3 Boeing 757-200 aircrafts. Allegiant provides charter air services under long-term contracts, as well as on a seasonal and ad-hoc basis. It primarily sells air travel on a stand-alone basis, as well as bundled with hotel rooms, rental cars and other travel-related services. Allegiant is the most expensive stock on the basis of valuations among the regional airline companies. On a forward P/E basis, a 12-months trailing EV/EBITDA basis, and a P/FCF basis, the stock is trading at 13.6, 6.1 and 14.4 times compared to its peer average of 9.9, 5.2 and 10 times respectively.

Hawaiian Holdings ( HA) has been given buy rating by UBS and a price target of $9 per share. Hawaiian, through its subsidiary, Hawaiian Airlines, offers air transportation for passengers and cargo. The company provides scheduled and ad-hoc services on its Pacific routes between Hawaii and far-east Asia. It operates a fleet of 15 Boeing 717-200, 18 Boeing 767-300 and 3 Airbus A330-200 aircrafts. Hawaiian trades cheap at 5.0 times the forward P/E and 2.2 times the 12-months trailing EV/EBITDA compared to its peer average of 9.9 and 5.2 respectively. Moreover, the stock also appears cheap at 0.8 times the price-to-book-value compared to the peer average of 1.6x. Whitebox Advisors boosted its stake in HA by 19% during the third quarter.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

More from Investing

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

9 Stocks Goldman Sachs Thinks Will Blow Wall Street's Performance Away in 2019

9 Stocks Goldman Sachs Thinks Will Blow Wall Street's Performance Away in 2019

Jim Cramer on U.S.-China Trade: The Media Has it Wrong

Jim Cramer on U.S.-China Trade: The Media Has it Wrong

Is Tesla's Stock Set to Nearly Double to $500?

Is Tesla's Stock Set to Nearly Double to $500?

Tesla's $78,000 Model 3 Is a Bargain. Here's Why

Tesla's $78,000 Model 3 Is a Bargain. Here's Why