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2 Undervalued Airline Stocks

Alexander MacLennan
October 6, 2013

With traditionally high debt levels and a struggle for profitability, airlines rarely come to mind when one thinks of value investments. But when some players in an industry are unloved by the market, their stock prices can become temporarily depressed. Here we will look at two airlines that fit an undervalued profile.

Unnecessary discount
The news surrounding US Airways (NYSE: LCC) recently has almost entirely centered on the airline's proposed merger with American Airlines parent company AMR (NASDAQOTH: AAMRQ). While this merger would play a major role in shaping the future of US Airways (which would become American Airlines Group upon the merger), the results of the trial determining whether the airlines can merge are not do-or-die.

While US Airways has strong potential upside from a successful completion of the AMR merger, I see US Airways as having limited downside based upon the airline's strong cash and earnings positions. Trading for a price-to-earnings ratio under 7, US Airways has enough earnings to theoretically support the current share price on its own.

In addition, the airline has nearly $20 per share in cash. Although US Airways still has billions in debt, future earnings should be enough to manage this debt load and possibly reduce it over time. In the event the AMR merger fails, US Airways is still likely to be hungry for expansion and may use some of this cash to acquire a smaller carrier in a deal more likely to be approved by the DOJ.

Alternatively, US Airways could use some of this cash to buy back shares while they trade in the single-digit P/E range. By doing this, US Airways would join the likes of Delta Air Lines and Alaska Air Group, parent company of Alaska Airlines, in launching share buybacks.

International sale
Canada's largest airline, Air Canada (TSX: AC.B), has been on quite a run lately as it topped the performance list of the TSX Composite. But even with this impressive run, Air Canada still trades cheap on a P/E basis, especially when future potential is factored in.

Even with shares hitting new highs since 2008, at C$4.47 per share they're still cheap based on a forward P/E ratio. Data fr