The U.S. Global Jets ETF (NYSEARCA:JETS) – whose top holdings include Delta (NYSE:DAL), Southwest (NYSE:LUV), American Airlines (NYSE:AAL) and United Airlines (NYSE:UAL) – has tumbled in 2020 as the novel coronavirus pandemic has left airports globally looking like ghost towns.
But the absence of air travel is temporary. In time, it will rebound.
Sure, it will never rebound to pre Covid-19 levels, mostly because business travel will be permanently reduced going forward as more and more companies adopt work-from-home and hybrid work strategies. That’s a big hit for U.S. airlines – and the JETS ETF – because business travelers account for 75% of airline profits.
But, consumer travel will rebound, and even after you factor in a permanent hit to business travel, many of the stocks which comprise the JETS ETF – like DAL stock, AAL stock and UAL stock – are terribly undervalued today.
So my two cents is simple.
Buy the JETS ETF. Weather the turbulence. And hold for the next two to three years, because of that stretch, I think this ETF could almost double.
Consumer Air Travel Will Rebound
There’s no doubt about it. Consumer air travel will rebound back to and above pre-Covid-19 levels, and it will likely happen sooner than most expect.
The appetite to travel and see the world is large. Last summer, more than 70% of Americans were planning to take a big summer vacation. That’s why this year – amid the pandemic which kept people off planes – consumers didn’t just sit at home and twiddle their thumbs. They traveled in “safe” ways.
The number of road trips Americans went on this summer increased more than 70% year-over-year, while RV sales have been soaring, with July sales up 54% year-over-year.
So, consumers are still traveling. They just aren’t doing so by plane because it has been deemed “unsafe” by the general public.
This won’t last. We will get the virus under control, most likely through mass vaccinations at some point in 2021. As soon as we do, public fear of flying will disappear. And this enormous consumer appetite to travel will flow from cars and road trips today, back to planes and flights by 2022/23.
Less Business Air Travel
There’s also no doubt that business air travel will be permanently reduced going forward.
That’s because a big chunk of companies and employees have permanently shifted to work-from-home or hybrid work strategies. Business surveys put the percent of businesses and employees who have shifted to permanent work-from-home models at anywhere between 20% and 67%.
Big range. I know. But the bigger point is that a lot of businesses are adopting hybrid work models, and in those hybrid work models, business air travel gets reduced, because you just do Zoom (NASDAQ:ZM) or RingCentral (NYSE:RNG) meetings.
This, of course, is an awful thing for airline stocks and the JETS ETF because while business travelers only comprise 31% of air travel volume, they account for 75% of airline profits.
How much will business air travel get knocked?
That’s the million-dollar question. I don’t have a million-dollar answer. But based on the rate of companies shifting to work-from-home models, current air travel trends and the increasing ubiquity of Zoom, I have a feeling that business air travel will be permanently reduced by somewhere around 50% in the early 2020s.
Airline Stocks Are Undervalued
If you do the math here, even a 50% decline in business air travel implies pretty big upside for the JETS ETF over the next few years.
Let’s assume consumer air travel volume, revenue and profits rebound to pre-Covid levels by 2022/23 for most major airlines. Let’s also assume that by 2022/23, business air travel volume, revenue and profits also rebound, but to 50% of their pre-Covid levels.
If you assume the 75/25 business/consumer net profit mix for airlines, then that math implies a 38% drop in airline net profits from pre-Covid levels to 2022/23. Factor in some growth on the consumer side – because of things like global urbanization and rising purchasing power of young consumers (who like to travel more) – and it’s quite likely that for most major airlines, 2022/23 earnings per share come in around 30% below 2019 levels.
United Airlines did $12.05 in 2019 earnings per share. American Airlines did $4.90. Delta did $7.30.
By my math, then, United Airlines will do around $8.40 in 2022/23 earnings per share. American will do ~$3.40 and Delta will do ~$5.10. Based on an airline sector average 8-times forward earnings multiple, that implies 2022/23 price targets of roughly:
$67 for UAL stock, up about 100% from the UAL stock price today.
$27 for AAL stock, up about 130% from the AAL stock price today.
$41 for DAL stock, up about 35% from the DAL stock price today.
The JETS ETF is just a composition of all those stocks. If all of those stocks have huge upside potential over the next few years, then so does the JETS ETF.
Bottom Line on the JETS ETF
Consumer air travel will rebound in big way over the next few years. Business air travel won’t.
Under that simple and very reasonable assumption, the math says airline stocks have big upside potential between now and 2022/23.
So, if you time is on your side and your can stomach near-term turbulence, buy the JETS ETF.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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Gallery: 5 Airline Stocks Set to Survive the Pandemic (InvestorPlace)