Are All Airlines Now Overvalued in the 2014 Outlook?

If analysts have a price target that is lower than the current share prices across the board for a sector, does that make the entire sector overvalued. This is no simple question, because it is too easy to say “Yes” as your answer. Wall Street analysts have notoriously been chasers, moving price targets up as shares rise and down as they fall. The problem we are faced with now in the airline sector is that the consensus price targets are either lower than most major airliner stock prices today or there is so little upside that the risk-reward ratio is too great.

The pending merger of AMR Corp. (OTC: AAMRQ) and US Airways Group, Inc. (NYSE: LCC) has gone from being blocked to now looking far more likely now that the companies have offered up concessions. This is going to give the entire airline sector some serious pricing power and the power to jam customers into planes like sardines if they want, plus the right to bilk endlessly with fees for everything. Unfortunately, all of the good news may be priced into the airline stocks at this time.

24/7 Wall St. decided to look at the major airline stocks. All have had serious gains of late based upon a more willing Department of Justice in this second mega-merger among legacy air carriers. If the consensus airline price targets from Thomson Reuters are not adjusted between now and the end of the year, then airline stocks are quite simply going to screen out as overvalued going into 2014. There may still be more than meets the eye to the bulls, but what are investors to do when everyone believes that a sector has run too high?

AMR’s share price of $12.03 compares to a consensus analyst target supposedly of $13.00. We have a hard time trusting this figure because it is an OTC stock. Merger partner US Airways Group, Inc. (NYSE: LCC) trades at $24.30 currently, yet its consensus price target is up at $28.40. It is the rest of the sector where things look too pricey.

United Continental Holdings, Inc. (NYSE: UAL) just hit a new multi-year and post-merger high of $39.88 on Monday. At $39.85 currently, its 52-week range is $19.54 to $39.88 and its market cap is $14.4 billion. The Thomson Reuters consensus price target of $39.58 is now under the current share price. We would point out that the highest analyst price target is up at $50.00, so at least one analyst believes there is a lot more room to run here.

Southwest Airlines Co. (NYSE: LUV) has also been on fire. Its stock just hit a multi-year high of $18.80. At $18.65, its 52-week range is $9.16 to $18.80. Thomson Reuters has a consensus price target of almost $18.60. Southwest is now worth $13 billion in its market cap. The median price target is barely higher at $19.00, and the street high analyst target price is $22.00 for the stock.

Delta Air Lines Inc. (NYSE: DAL) just hit a new high of $29.39 as well. At $29.17, its new 52-week range is $9.50 to $29.39 and its market cap is worth close to $25 billion. The UAL-Continental merger and AMR-US merger may leave Delta as odd-man-out for the legacy carriers. The consensus price target is only a few percent higher at $30.88 and $34.00 is the highest price target.

Then there is JetBlue Airways Corporation (NASDAQ: JBLU). JetBlue would be the last major regional or super-regional carrier to go after of any size. At $8.97, the stock recently traded as high as $9.20 versus a 52-week low of only $4.89. This is the highest share price since 2007 and its market value is $2.5 billion. The consensus analyst price target from Thomson Reuters is just under $8.50, but supposedly one analyst target price is all the way up at $12.00.

Here are the forward 2014 P/E ratios if the consensus earnings estimates are met:

United Continental 9.7 Southwest 14.9 Delta 9.6 JetBlue 13.5

Spirit Airlines, Inc. (NASDAQ: SAVE) is an airline we treat entirely different than other carriers because it is truly the biggest discount airline out there. Its market cap is still worth $3.3 billion and it trades at more than 16-times expected 2014 earnings. Sales growth is still high here because it is still expanding, and if the legacy carriers all get to bilk then it allows the lowest-fare carrier the chance to be a bit less-low even if it is still the lowest. At $45.80, its 52-week range is $16.12 to $46.40. For a comparison of expected sales, JetBlue is expected to have 2014 revenue of almost $5.9 billion versus $1.93 billion for Spirit.

The situation taking place in the airline sector now is that the industry consolidation is taking all of the consumer empowerment away. Airlines can shove you into whatever sized seat they want, and Gordon Bethune would probably tell coach flyers on a CNBC appearance that they are just lucky to not have to sit on the wing or to be shoved into the cargo area. Airlines can now charge you for a carry-on bag or a checked bag. They can charge you too much for that (not-so) wonderful food. Internet and movie charges, and on and on.

All of the new shifts may change the framework for how airlines are valued. Conceivably, even Warren Buffett could change his opinion about owning airline stocks. Their P/E ratios used to be 5 to 8, but now they are much higher. The airline stock prices may go higher still, but we would warn investors that buying now is on the heels of major rallying in the stocks. For these to go much higher logically it is going to take not just one or two analyst upgrades. Much more of a rally will take almost all of these analysts to admit that they were far too conservative in recent years and that a permanent and upward valuation paradigm shift has taken place.