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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

US Airways

November 26th 2013 US Airways
NYSE Symbol: LCC
Industry: Airline
Price as of 11/25: $24.24

Following the Fed minutes last week, the Fed tapering is back on the table. The 10 year interest rate is backing up toward 3% once again. The stock market is trying to pullback with little success (seven straight up weeks). An amazing run this year with every modest pullback met with more buying. The financials have perked up once again after consolidating for several months. The bigger the fees and fines against JP Morgan (in the billions now), the higher the stock price goes. Looking forward into 2014, it's getting tougher and tougher to find value. Every sector is up 13% or more for the year. The utilities and telecom are the only two sectors not up 20% or more. Materials and the commodity space provide good value as long as the global economy continues to improve into 2014. Freeport McMoran remains a value stock for global growth. This week we'll highlight the airline sector, a sector that has always struggled to make money and has typically been a poor investment. However lower gas prices, improving global growth and an industry that has consolidated down to just 5 major carriers in the US has been a boon to the bottom line of most airlines. This week we'll highlight US Airways (LCC) soon to be called American Airlines Group (AAL) following their $17 billion merger. In the short term there will be plenty of noise as the two companies merge together, but an improving profit picture and cost savings from consolidation bodes well for US Airways and their shareholders.

Back in October, US Airways reported earnings of $1.16 per share, beating estimates as sales rose 9.1% year/year to $3.86 billion. The carrier is profiting from decisions to increase the average size of its aircraft and add seats to some of its planes, both of which boost efficiency. US Airways also benefited from strong travel demand over the summer. The current quarter results could be disappointing due in part to the government shutdown in DC. Investors seem to be looking past that into 2014. Improving global growth should keep the airline profits moving higher. The airline industry will be one of the main beneficiaries of the growing middle class around the world. US Airway's International business is almost exclusively on the east coast with transatlantic flights to Europe. The improving fundamentals in Europe are a good sign for US Airways. Besides the improving economic landscape, the pending merger with American Airlines is another positive for US Airways. The combined revenue will vault the company to the top of the industry with $42 billion in sales. An expected billion dollars in synergies should improve the bottom line along with improving fundamentals.

Even with the improving fundamentals, US Airways still trades for a lower valuation than other airlines. US Airways trades for 7 times earnings, verse 9 times earnings for Delta and UAL. Next year's earnings will be noisy due to the merger, consolidation and accounting changes. As mentioned, US Airways expects the merger to save them a billion dollars. The merger synergies and improved business has some analysts expecting $4 to $4.50 a share in earnings for 2015. Following earnings in October, Deutsche Bank upgraded US Airways with a $30 price target. Deutsche Bank upgraded US Airways due to the improving fundamental which in their opinion transcends the potential uncertainty surrounding the merger. US Airways provides no dividend and is cyclical in nature, but for growth investors looking to benefit from the improving global fundamentals, US Airways and the other airlines look like a good bet.