The Back Story. It’s been an up-and-down story for airlines in 2019. On the downside, there have been analyst downgrades, a worry about a lack of catalysts, and the high cost of the government shutdown that’s continued long after the reopening. Yet it’s not all bad news: We’ve also gotten a number of robust earnings reports, analyst upgrades, and the ongoing presence of rumors that Warren Buffett wants to buy an airline, proof, if nothing else, that the industry has come a long way from its messy operations of the past.
What’s New. On Friday, Deutsche Bank’s Michael Linenberg downgraded both American and Delta to Hold, lowering his price targets by $2 to $73 and by $11 to $55, respectively. “The stream of global macro data points have been less encouraging of late suggesting to us that the industry risks are now more biased to the downside,” he explains “That said, we are finding it more difficult to advocate ‘new money’ positions in names with the most exposure to global markets.”
He also tweaked his first-quarter earnings estimates down for most airlines based on the government shutdown, although he doesn’t think that the event will be a major setback for any carriers. As for valuation, he argues that the Big Three, which includes United Continental Holdings (UAL) along with Delta and American, is trading at a discount to their trading range, but that might not be too far off, given that we’re a decade into post- Great Recession economic expansion.
Looking Ahead. For its part, Barron’s argues that airlines have become too cheap and investors too pessimistic. And despite the downgrades, Linenberg’s stance isn’t all that different: He believes management at Delta and American will “respond quickly to address any possible fall-off in demand,” and he reiterated a Buy rating on United, which still has plenty of “low-hanging fruit,” to pick despite the ongoing success of its strategy.
He also thinks that there’s value in more domestic-focused names, and those with self-help stories. Alaska Air Group (ALK), Southwest Airlines (LUV), and Spirit Airlines (SAVE) are his top picks that are “supported by a U.S. economy that continues to perform relatively well.” He’s also slightly lowered his price targets on a number of stocks, however, to reflect global risk.
American and Delta are both down about 2.2% in recent trading, to $34.84 and $48.48, respectively.
The U.S. Global Jets ETF (JETS) was trading at $30.60 per share on Friday afternoon, down $0.24 (-0.78%). Year-to-date, JETS has declined -6.02%, versus a 5.49% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Barron’s.
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