Airline investors have been grounded.
Airline stocks lost altitude in 2018 with the U.S. Global Jets ETF (ticker: JETS) dipping 3 percent overall year to date. Rising fuel prices and labor costs have kept airline investors grounded this year, but JPMorgan Chase & Co. analyst Jamie Baker recently upgraded a handful of airline stocks based on several catalysts. Baker says a robust demand, depressed valuations and an opportunity for margin expansion has created buying opportunities for airline investors. But not all airline stocks are cleared for takeoff. Here are seven airline stocks to buy, sell or hold.
Hold: United Continental Holdings (UAL)
The plan for United Continental to expand its market share in hubs like Chicago, Houston and Denver hasn’t generated the capacity oversupply and pricing pressures that triggered a sell-off in the stock earlier this year, says Baker who supports United’s efforts to improve its margin profile and close its performance gap with competitors. The company’s goal of hitting $12 in earnings per share by 2020 is reasonable, a target which would represent a 75 percent increase over 2017 EPS. JPMorgan has a “neutral” rating and $95 price target for UAL stock.
Buy: American Airlines (AAL)
American Airlines has been the worst-performing “big four” U.S. airline stock in 2018, lagging behind its peers and declining 28 percent overall. Baker says AAL stock has been punished too harshly for its 2018 margin erosion and predicts a 2 percent capacity expansion in 2019. American’s “basic economy” strategy, he says, has also yielded mixed results. But with the stock trading at a forward earnings multiple of around 6.8, AAL stock is simply too cheap to ignore. JPMorgan has an “overweight” rating and $46 price target for AAL stock.
Buy: Delta Air Lines (DAL)
JPMorgan is projecting 3.1 percent growth in 2019 for its revenue per available seat mile, known as RASM, a measurement used to compare the efficiency of various airlines. But Baker says Delta will lead the way with 4 percent growth. He says Delta has the highest margins among major airlines and is the leading innovator in the industry. Delta’s balance sheet is the gold standard among airlines, clearing the way for both a 2.4 percent dividend yield and aggressive share buybacks. JPMorgan has an “overweight” rating and $71 price target for DAL stock.
JetBlue Airways Corp. (JBLU)
JetBlue is targeting 90 percent EPS growth from 2018 to 2020. Baker says JetBlue has a shaky track record of controlling costs, which is one of the reasons the stock trades at a valuation discount to peers. Management has pledged to keep ex-fuel cost per available seat mile at or below 1 percent compound annual growth over the next two years. He says a forward earnings multiple less than 10 and relatively low expectations give JetBlue stock a compelling risk to reward skew. JPMorgan has an “overweight” rating and $20 price target for JBLU stock.
Hold: Spirit Airlines (SAVE)
Baker says Spirit Airlines should be able to grow its RASM by at least 12 percent annually over the next two years, a development that will help improve its unit revenue trajectory. Increasing the number of markets with at least 20 daily departures has improved Spirit’s connectivity. Baker says Spirit has wisely been dialing back exposure from its most competitive markets. Unfortunately, Baker says Spirit has limited opportunity for upward earnings revision or earnings multiple expansion in the near term. JPMorgan has a “neutral” rating and $59 price target for SAVE stock.
Sell: Southwest Airlines Co. (LUV)
Baker says Southwest Airlines has the best long-term track record of profitability in the airline group, and the company has a very attractive balance sheet. In addition, he says the company’s new reservation system is showing signs of positive revenue returns. But he says Southwest’s 3 percent ex-fuel cost per available seat mile, CASM, growth guidance for 2019 is a red flag. Margin expansion is the central thesis for Baker’s bullish case for airline stocks in 2019, and 3 percent CASM growth will make margin expansion extremely challenging. JPMorgan has an “underweight” rating and $52 price target for LUV stock.
Sell: Alaska Air Group (ALK)
Alaska Air Group acquired Virgin America in 2016 for $2.6 billion, and Baker says the merger has created more financial headaches than anticipated. Historically, Alaska has been focused on shareholder returns, but acquiring lower-margin Virgin America pushed returns to the back burner. Baker says management is making the right move by capping supply growth in 2019 to offset Virgin’s overcapacity issues. An estimated 3 percent ex-fuel cost growth next year will make margin expansion difficult. JPMorgan has an “underweight” rating and $57 price target for ALK stock.
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