While it may be old hat in investment circles to advocate the
categorical avoidance of airline stocks, this overly-reductive
adage overlooks the very real benefits of short-term trades in
airline stocks.
One such example is the recent performance of China Southern
Airlines (
ZNH
,
quote
).
While global markets have tumbled over the past month, China
Southern has served as somewhat of a safe harbor; the stock has
outperformed the S&P 500 (
SPY
,
quote
) over the past month, down only 4% compared to the benchmark's
8% drop.
Juxtaposed with other emerging market equities, China
Southern's performance is even more impressive: -4% versus -12.9%
in the iShares MSCI Emerging Market Index (
EEM
,
quote
).
The reason why the stock has held up over the past month are
manifold. First, the stock had been beaten up badly all year
because of rising oil prices. After a ten-month downtrend, the
stock may technically be finding a bottom.
China Southern Airlines is
particularly sensitive to the price of oil
. Tthe Chinese government severely
limits the hedging flexibility of its state-run carriers
after losing billions on hedges at the beginning of the financial
crisis. While such policy is burdensome in times of sky-high oil
prices, when the price of oil falls substantially China Southern
stands to benefit. With a prolonged slowdown on the horizon,
China Southern's bottom line could actually improve in spite of
the general macroeconomic turmoil.
The prospect of a Chinese slowdown is outweighed by the rapid
growth of the Chinese domestic aviation sector. The Centre for
Asia-Pacific Aviation sees
China's domestic passenger growth returning to double
digits
this year. Domestic passenger numbers should top 300 million, and
Beijing should surpass Atlanta as the world's largest airport in
terms of annualized passenger traffic. Continued growth at one of
China Southern's most important hubs, Beijing Capital
Airport, will benefit the carrier. The airline continues to
expand,
continually increasing the company's fleet size
and
adding 34 new routes this winter
.
Evaluating certain metrics in the stock is somewhat difficult;
ZNH's current P/E is a paltry 6.7, but its forward P/E is a large
53.2. However, the forward numbers evaluated the stock of China
Southern Airlines while factoring in a much higher
jetfuel price. As the price of oil comes down, analysts may
issue upward guidance revisions. In other words, the stock is
probably cheaper than its forward P/E ostensibly suggests.
If the global economy is able to avoid real economic calamity
(a euro collapse or an outright Chinese housing crisis), China
Southern Airlines could be an attractive place to hide out as
markets fall globally.
However if any of the aforementioned crises or a black swan
event occurred, investors would need to reconsider. While China
Southern Airlines may look like an attractive stock in which to
purchase speculative calls, it should be noted that volume is
very light in ZNH options, spreads are very wide, and exiting a
position could be difficult. As such, buying the stock rather
than options is the recommended play for ZNH.
