Sometimes overseas research can have an impact on U.S. stocks. It’s actually more common than you might think, and that’s the case in the legacy airline group on Friday, September 6, 2019. A European firm called Berenberg has initiated coverage of the legacy air carriers with a mixed bag, but the Buy ratings appear to be strong enough that they are lifting the less than aggressive companies as well.
According to the Berenberg, the investing community has been worried about airline capacity growth and weak seat demand. The firm sees the U.S. airlines generating enough free cash flow in a range of market scenarios and selective opportunities in the space. The firm also pointed out that there should be pretax margin expansion in 2020, even with concerns about pricing.
Here, additional color has been added and the consensus estimate comparisons are against the Refinitiv sell-side data. Remember that most analyst ratings in traditional S&P 500 stocks now come with implied total return upside of about 8% to 10% at this stage in the 10-year old bull market.
American Airlines Group Inc. (NASDAQ: AAL) was started with a Buy rating and assigned a $35 target price. The prior closing price was $27.69 and the prior consensus target price was $38.75. Shares of American Airlines were trading up 1.3% at $28.05 on Friday, in a 52-week range of $24.23 to $43.89. This carrier is valued at less than six times expected earnings per share for this year and even lower than next year’s consensus estimate.
Delta Air Lines Inc. (NYSE: DAL) also was started with a Buy rating, and it was assigned a $72 target price in the call. Shares closed at $58.19 ahead of the call, and the consensus target price was $69.94. Delta was also up 1.3% at $58.96 a share on Friday morning, in a 52-week range of $45.08 to $63.44. It is valued at about eight times expected earnings.
Southwest Airlines Co. (NYSE: LUV) was started with only a Hold rating and was given a $57 target price, which is lower than the $59.06 consensus target price. This is less implied upside compared with the $52.52 prior closing price, but Southwest shares were still up 0.6% at $52.83 on Friday morning. The 52-week range is $44.28 to $64.02.
United Airlines Holdings Inc. (NYSE: UAL) was started with a Hold rating and assigned a $95 target price. The stock previously closed at $85.84, and the consensus analyst target is much higher at $109.80. This carrier’s shares were up 1.2% at $86.90 on Friday morning, in a 52-week range of $77.02 to $97.85.
While airlines have problems when fuel prices rise, they benefit when prices drop. After all, they get to pass on fuel surcharges if the prices rise too much and they are sometimes slow to lower prices as fuel costs come down. Jet fuel prices seem to be in the middle of a range-bound pattern seen over the past two years.