In airlines, Southwest, 3 others high-fliers

Freight-forwarder Expeditors also winner in transportation sector

January 20, 2002|By Jonathan Schrader | Jonathan Schrader,MORNINGSTAR.COM

As with most industries, there are a few companies in the transportation sector that really stand out from the pack. Southwest Airlines comes to mind in the airline industry.

Two other airlines, Atlantic Coast Airlines and SkyWest, have also shown an ability to outperform their rivals in the regional airline industry. And across the pond, little Ryanair, based in Dublin, Ireland, has been a real high-flier over the past few years.

We also have a favorite in the shipping business, Expeditors International, a well-run freight forwarder that has generated a 31 percent annual return over the past 10 years.

You may be asking why, given the current state of the airline industry, we are suggesting that four airlines be on your watch list. Our answer: These four airlines don't fit the mold. Southwest and Ryanair are low-cost providers whose operating practices have been at odds with industry convention since they opened for business. Their low-cost structures allow them to offer tickets at 20 percent to 30 percent below rivals' prices, which has led to impressive long-term growth; future prospects look just as good.

Atlantic Coast Airlines and SkyWest, meanwhile, face very few of the risks that traditional airlines encounter. This results from their relationships with Delta Air Lines and United Airlines. Basically, there are certain cities that these two mainline carriers cannot serve cost-effectively, so our two companies do it for them.

Atlantic Coast Airlines operates flights for Delta and United in the eastern United States, while SkyWest performs the same role out West. In exchange for this service, Atlantic Coast Airlines and SkyWest are guaranteed a set operating profit margin, so increases in fuel and other costs (within reason) have little to no impact upon profits. It is very likely that these two airlines will see significant growth in capacity, revenue and earnings over the next decade, since the economics are so appealing to the mainline carriers.

Finally, we are convinced that Expeditors International is one of the best companies out there. Management is exceedingly forthright and is focused upon shareholder value. Earnings per share have grown at an annual rate of 33 percent over the past five years, right in line with the 33 percent growth rate for revenue. What's more, the firm has achieved Morningstar grades of A-plus in both profitability and financial health. Again, we believe the firm's growth prospects are excellent, and with such great management, we see nothing but smooth sailing ahead.

Unfortunately, because these companies are so superior and have such great prospects, their stocks are hardly ever on sale. Right now, Southwest is trading just above our fair value, while Expeditors is trading about 10 percent below our fair value. Ryanair, Atlantic Coast Airlines and SkyWest are three of the newest additions to the growing list of stocks Morningstar covers, so we don't yet have our fair values for them. However, in relative terms, none of these stocks looks cheap.

But these are the types of companies you may just have to pay up for. ... We would suggest considering these stocks as long-term holdings, or else wait for them to fall a bit over the next few months.

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