Are Airlines Worth More Now Than They Were Pre-Pandemic?

The airlines have come a long way from their pandemic lows, with investors excited about the opportunity for the businesses to rebound this summer as a COVID-19 vaccine becomes more widespread and consumers head out on vacation. There is real reason for excitement, but given how far the stocks have climbed, there are also concerns that the stocks have climbed too far too fast.

On this clip from Motley Fool Live, recorded on March 4, Fool.com contributor Lou Whiteman talks to "The Wrap" host Jason Hall about the sudden surge in airline valuations. 

Jason Hall: Let's talk about this bull-run that airline stocks have been on?

Lou Whiteman: Let's talk about airline stocks but first, let's rewind and go-back about a year ago to the early days of the pandemic. A lot of these airlines were in the process of losing upwards of 75 percent of their stock value in the last March and April. For the record now, I was on the record then saying the industry is actually a lot healthier than the markets believe and there was an overreaction. I think that has proven to be the case. The entire US airline sector has easily beaten the S&P 500 since April. Most have doubled the index since the end of April. Especially right now, with good reason these stocks are up. We all want to get out of the house, there's a lot of pent-up demand. The vaccine rollout is happening. President Biden yesterday said, all the adults are going to have their shots hopefully by the end of May. We are really set up well to have a busy summer travel season. That's got people excited.

Unfortunately, this is me being Debbie Downer now because I think we've come too far too fast. Consider, we are still likely a year or more away from a recovery in business demand. A year or more for international demand to come back. Those two areas historically have been a lot more lucrative than leisure travel. Leisure travel tends not to be the real money maker for an airline. While many of these stocks haven't returned to pre-pandemic level, if you look at these companies in terms of their enterprise value, which is their market cap, plus their total debt, it tells a very different story. Actually, a lot of them you can see by the chart. Thank you Jason. This industry is being valued higher than it was pre-pandemic. Spirit Airlines (SAVE -2.77%) is 30 percent higher than it was on January 1st, 2020. While I do think they're in decent shape and I do think they are survivors here, it's tough for me to look at the last year and the outlook for the next couple of years and say, "Yeah, they deserve a higher valuation than they were pre-pandemic." There's an important lesson here too that goes well beyond the airlines. The lesson here is to remember that debt. Over the last year, this industry has added a ton of cash and it was key to helping them survive the crisis, it wasn't a bad move to do it. But when you're looking at the value of a company, enterprise value is a measure of the market capitalization plus the debt, it gives you a pure picture of what's this company...

Hall: If somebody wanted to buy the company, this is whatever costs to buy it because you assume the debt.

Whiteman: This is what it would cost because you would have to own that debt. Just looking at the stock price, in this case, I think is very deceiving. They aren't still a bargain. I'm not saying the airline industry is uninvestable. If you look at that chart, Delta (DAL -2.88%) in particular, on enterprise value, it looks really intriguing. I'm not selling my shares because of this, but I am concerned the near-term upside from here is likely a lot less than what investors focused on share price realize and I think it's worth a word of warning here.

Hall: I'm going to show one more chart here that this is what essentially the same group of stocks has done, just since the beginning of 2021, so there is very much, how durable it proves out to be, but I think there's definitely some asset rotation happening here. I mean, with the S&P 500 close today down less than a percent-and-a-half. When we talk about all of these tech stocks, all these high-growth stocks, they've done so well for all of us over the past year, are getting crushed. There is some of that that's happening.