Airline stocks could be headed for turbulence

Taking Stock

Your Money

April 25, 2004|By ANDREW LECKEY

What do you think of Delta Air Lines Inc. and Southwest Airlines Co.? I'm a 33-year-old investor.

- H.P., via the Internet

You picked a challenging industry in which to place your money.

The airline industry is always volatile, but the uncertain travel trends since 9/11, failed attempts to raise fares and the highest jet fuel prices in a year have proved especially tough.

Air travel is increasing, but the shareholders of Delta, the nation's third-largest carrier in revenue, and Southwest, the ultra-efficient discount carrier, have little else to cheer. Furthermore, both carriers face fierce competition from upstart discount carrier JetBlue.

Shares of Delta (DAL) are down 32 percent this year after declines of 2 percent last year and 58 percent in 2002. Southwest (LUV) shares are down 11 percent after a gain of 16 percent last year and a drop of 25 percent in 2002.

High fixed costs are Delta's burden. Southwest must try to keep its low costs from rising.

Delta has good labor relations and is generally more profitable than rivals American and United. It is expanding global alliances and has the potential to add regional jets. But it still has huge losses, is vulnerable to pricing pressures and must begin cash payments to a retirement plan that's underfunded by $250 million. Eighty-eight percent of Delta's capital is borrowed, and Standard & Poor's has dropped its debt rating to B-, the sixth-highest junk rating.

Southwest's profits are up, and the carrier is becoming dominant in markets such as Baltimore and Las Vegas. Soon after initiating service to Philadelphia next month, it will increase its daily flights there to 28.

US Airways considers Southwest a threat to its future. Southwest faces the possibility of higher labor and fuel expenses, and imitators invading its markets.

Both stocks receive consensus analyst ratings midway between "buy" and "hold," according to the Boston-based First Call research firm.

For Delta, that consists of four "strong buys," one "buy," six "holds," one "sell" and one "strong sell." In the case of Southwest, it's two "strong buys," four "buys," six "holds" and one "sell."

With transportation industry earnings expected to rise 21 percent this year, the predictions are for 42 percent growth at Southwest. Next year's expected industrywide increase is 13 percent, vs. a 35 percent increase for Southwest. Delta is expected to post losses both years.

Delta's projected five-year annualized growth rate is 12 percent, compared with 15 percent for Southwest and a 14 percent rise expected industrywide.

I'm new to investing. I'd like to set up a small account with a discount broker. Which broker has the cheapest commissions?

- L.T., via the Internet

Commissions will vary based on how many trades you make and how much money you have in your account. That means traders who are active or have significant assets with the broker generally get a better deal.

For an investor with the minimum required to open an account, here are some of the least expensive brokers, according to the Gomez Inc. research company in Waltham, Mass.:

Brown & Co. (www.brownco.com) with $5 commissions on market orders and $10 commissions on (price) limit orders.

Firsttrade (www.firstrade.com) with $6.95 commissions on market orders and $11.95 on limit orders.

Scottrade (www.scottrade.com) with $7 commissions on market orders and $12 on limit orders.

Those three firms are small. Among larger discount brokers, Ameritrade (www.ameritrade.com) charges $10.99 for both its market and limit orders.

I own First Eagle Global in my retirement portfolio and it has done pretty well. What can I expect from this fund in coming years?

- B.G., via the Internet

Unlike a foreign fund that can't invest inside U.S. borders, a world fund can include significant holdings of any country.

As a result, this fund's major portfolio concentrations are North America with 37 percent, the United Kingdom and Western Europe with 34 percent, and Japan with 17 percent.

Run by famous lead manager Jean-Marie Eveillard since 1979, it has favored bland companies in unexciting industries that seem underpriced because they have strong products and management that eventually should be recognized by the market.

The $4.2 billion First Eagle Global "A" rose 48 percent in the past 12 months and had a three-year annualized return of 20 percent. Both results rank within the top 10 percent of all world allocation funds.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.