In his recent annual letter to fund partners, Kase Capital’s Whitney Tilson disclosed the fund’s top holdings going into 2015. Both JetBlue Airways Corporation JBLU 1.66% and Delta Air Lines, Inc. DAL 0.53% are among the Kase Fund’s top 10 holdings. In the letter, Tilson specifically addressed his bullish stance on the airline industry.
Consolidation Is Key
According to Tilson, the massive consolidation in the airline space has created an incredible value opportunity for investors. Tilson compares the value creation resulting from airline consolidation to similar scenarios that played out in recent years in the semiconductor and car rental spaces.
Strong Fundamentals
As a result of the consolidation, the fundamentals in the airline industry are in great shape. Tilson points out seven specific fundamental conditions that currently stand out to him:
- 1. Strong pricing
- 2. High fees
- 3. Full planes
- 4. Restrained capacity growth
- 5. Solid labor relations
- 6. Cheap fuel
- 7. Capital return programs at each of the four major carriers
Cheap Stocks
Despite all of these strong fundamentals, Tilson believes that airline stocks remain undervalued, pointing out that JetBlue, Delta and American Airlines Group Inc AAL 0.57% trade at 2015 estimated earnings multiples of only 10.2x, 9.3x and 4.7x, respectively.
Outlook
Airline stocks majorly outperformed the S&P 500 in 2014, but Tilson believes that the space’s strong fundamental picture will continue to drive prices higher in the long-term. “While in the short term airline stocks will likely trade in like with oil prices, which I have no ability to predict, in the long run I believe the industry consolidation story is still intact and has many more years to run,” Tilson explained in the letter.
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