4 Airliners Morgan Stanley Just Revealed They Love

In a report published Tuesday, Morgan Stanley analyst Rajeev Lalwani initiated coverage on several Airlines, referring to the industry’s “structural positives, impressive ~10% FCF yields, double-digit EPS growth.” The analyst favors four carriers in particular.

• Delta Air Lines, Inc. DAL - Initiated with Overweight and a price target of $65.

In the report Morgan Stanley noted, “Delta is one of the more attractive airlines within our coverage universe as it provides investors a very balanced profile between its mid-teens free cash flow yield, billions of dollars in capital returns, a move towards an investment grade balance sheet, and a variablized cost structure.”

Analyst Rajeev Lalwani believes that the risks related to labor inflation and higher oil are “well accounted for in our estimates and valuation.”

• United Continental Holdings Inc UAL - Initiated with Overweight and a price target of $86.

Lalwani considers United Continental as “the best value play in the group” provided that the environment continues to be supportive, with “stable demand, capacity discipline, and low fuel prices.”

Lalwani believes that the company is “most levered to the cycle given high operating leverage, while also providing the highest free cash flow per share yield in the group at ~18% our 2016e.” Moreover, the United Continental management team is expected to “maintain its disciplined approach to managing the business through its cost, revenue, and capital allocation initiatives,” the report stated.

• Alaska Air Group, Inc. ALK - Initiated with Overweight and a price target of $83.

Lalwani considers Alaska Air as a quality airline, in view of its “leading ROICs, an investment grade balance sheet, above-average capacity growth, and strong capital returns.” However, Alaska Air’s shares have been under pressure on account of unit revenue weakness in the company’s core Seattle market.

“We see these additions peaking in mid-2015, thus expect unit revenue trends to improve over the coming months. This dynamic combined with in-line valuation and our projection of 20%+ capital return through 2017 should be supportive of shares,” the report added.

• Spirit Airlines Incorporated SAVE - Initiated with Overweight and a price target of $82.

Spirit Airlines has generated 15-20 percent growth per annum, providing investors with “the best capacity growth story in the group.” This is supported by “market opportunities in excess of 500 and limited need to access the capital markets,” Lalwani wrote.

“In addition, the airline has one of the lowest cost structures, which when combined with its inexpensive valuation and low-fare model, make shares attractive,” the report stated.