Delta Air Lines, Inc. (DAL), United Continental Holdings Inc (UAL): A Book Value Comparison Creates Two Different Camps of Airlines

On the other side of the table, some airlines trade at a substantial discount to book value. While legacy carriers were noted for trading above book value earlier, Air France trades well below book value. However, the legacy carriers are trading above book value largely because of strong current and expected earnings. By contrast, Air France has posted significant losses over the past few years, partially stemming from the slowdown in the Eurozone. A lack of confidence in the company’s earnings shows that the legacy carriers are not entitled to such a price/book premium–it has to be justified by other factors.

It may come as a surprise to some how regional competitors Republic and SkyWest, Inc. (NASDAQ:SKYW) can trade at such different price/book ratios. However, when one considers expected earnings it becomes at little easier to understand. Republic’s earnings are expected to increase by about 74 percent between 2012 and 2014 whereas SkyWest, Inc. (NASDAQ:SKYW)’s earnings are only expected to increase about 47 percent from $0.99 to $1.46 between 2012 and 2014. At first, a 47 percent increase would be seen as a reason for quite a price/book premium, but SkyWest is currently trading at a far higher P/E ratio than Republic.

Price to book, you decide

Looking at companies based on their book value is just one of many ways to perform an analysis. With airlines, investors have a broad selection of choices for this valuation component. Earnings, both current and forward, are a critical factor in determining airline share prices. In the end, airlines, like all investments, have many ways of being valued, and investors should decide for themselves which methods to give most weight.

The article A Book Value Comparison Creates Two Different Camps of Airlines originally appeared on Fool.com.