Among airlines stocks, JetBlue Airways Corporation (NASDAQ:JBLU) surged recently after reports surfaced that the company is being targeted for a buyout by David Neeleman who is tipped to be contemplating a merger between JetBlue and his start-up carrier Azul Linhas Aereas. The unconfirmed news not only lifted JetBlue but also worked wonders for Allegiant Travel Company (NASDAQ:ALGT) and Republic Airways Holdings Inc. (NASDAQ:RJET). While acquisitions usually unlock huge upside, there is no assurance of a buyout happening anytime soon. Here is a closer account of which stock might be a better fit for your portfolio:

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JetBlue, A Natural Acquisition Target

With its improving financial performance and attractive valuation, JetBlue Airways Corporation (NASDAQ:JBLU) is a natural acquisition target. At current market prices, the stock trades at a forward price earnings ratio of just 9 while offering a discount of 7 percent to its book value $6.8 per share. Its capital structure might be a little skewed in favor of interest paying debt but it is fine as long as the company keeps its handle on costs and manages to boost top line. Price by sales ratio of 0.35 also indicates undervaluation. In terms of financial performance, the company has been making strong recovery on annual basis although the first quarter performance was below street expectations with profits halving to $14 million despite a top line boost. On the positive side, the company is strengthening its balance sheet. During the quarter, it reduced its debt by $25 million and repurchased half million shares of common stock.

Republic Airways Stocks Moved Up

The same palpable enthusiasm can be found in the stock of Republic Airways Holdings Inc. (NASDAQ:RJET) – an Indiana based regional airline, although the ground realities justify a measured approach by investors. The stock has moved up 8 percent over the last 3 days and trades close to its 52 week high as the company seems to be making some progress in spinning off its Frontier Airlines subsidiary, although no formal announcement has been made so far. A bigger challenge awaits Republic Airways on the front of signing competitive labor agreements with its employees.

This is crucial as the company has been losing out on fixed-fee contracts from bigger airlines – a crucial aspect for any regional airline to survive. While this would have obvious impact on the top line growth, fixed costs and gearing will make sure that the net result on margins is more than proportional. This trend is already visible as the company reported 8.9 percent drop in sales during the most recent quarter. With debt equity ratio of 3.9 and price hovering near to its annual high, the stock is certainly not the best to invest in.

Small Is Beautiful

When economist Schumacher said ‘Small is Beautiful’, airlines were certainly not on his mind but the phrase applies beautifully on this sector. Nevada based leisure travel company Allegiant Travel Company (NASDAQ:ALGT) is among the better picks in the aviation sector. The company operates a fleet of more than 60 aircrafts primarily aimed at leisure destinations and small cities. Compared to its commercial counterparts, Allegiant’s business involves a higher degree of seasonality but still works out in its favor as it is largely free of unprofitable commercial commitments. This is visible in its margins as well. For the latest reporting period ended March 31, the company’s net profit jumped 47 percent to $31.9 million, translating into a margin of 11.7 percent, up from 8.6 percent for the full year 2012. Allegiant Travel’s stock has surged 12.7 percent over the last month but still trades at an attractive forward earnings ratio of 16.7.

If one has to take a fundamental call in the sector, Allegiant Travel Company (NASDAQ:ALGT) and JetBlue Airways Corporation (NASDAQ:JBLU) are among the better plays. Both are strong financially but JetBlue appears fully valued for commercial airlines. On the other hand, Republic Airways Holdings Inc. (NASDAQ:RJET) comes with a debt pile and labor issues and thus best avoided.