Barclays Fastens Seat Belt for Earnings Growth For Spirit, But Sees Shorter Runway For JetBlue

The ultra-low-cost air carrier market still has some spirit, despite overall concerns about consumer demand, Barclays said Monday, while singling out Spirit Airlines Inc. SAVE as set to fly higher.

It’s not all clear skies. While finding favorable tailwinds for Spirit, Barclays warned of possible headwinds for JetBlue Airways Corporation JBLU.

The Analyst

Barclays analyst Brandon Oglenski upgraded Spirit Airlines from Equal-Weight to Overweight and raised his price target by $5 to $70.

Oglenski downgraded Jet Blue from Overweight to Equal-Weight and lowered his price target from $27 to $20.

Oglenski remains Positive on the North American airline industry as a whole.

The Thesis

Spirit

Oglenski noted that Spirit led U.S. airlines in top-line revenue growth this past year and had margins above most of its peers. Barclays anticipates continued outpacing of peers' top-line growth and expanding margins.

“It is hard to overlook recent outcomes at Spirit, as revenue management initiatives, new market growth and an aggressive management team should continue to deliver earnings upside for investors,” Oglenski wrote in an industry note.

With the upgrade, Spirit becomes Barclays’ top pick in airlines.

Oglenski cited improvements in Spirit’s network reliability, success with revenue management efforts and expected growth opportunities in the market, and said Spirit shares are “significantly undervalued.”

Barclays expects Spirit’s earnings growth will be above 40 percent in 2019, with upside topping 35 percent in Spirit stock, Oglenski said.

JetBlue

Oglenski said Barclays was “somewhat reluctant” to downgrade JetBlue given bullish expectations by management for lower cost and higher revenue heading into the coming year – including guidance of EPS growth above 70 percent since 2018.

But JetBlue hasn’t yet been able to make meaningful improvements on a structural cost program and since 2016 unit costs are up 3 percent a year on average, Oglenski wrote in the note. JetBlue has the second highest unit cost among low fare carriers, he noted. Margins have declined since 2016 for the airline as well.

The Low Cost Carrier Market

Oglenski said the market appears concerned about domestic air travel demand, and cited softness reported recently by Alaska Air Group, Inc. ALK and Southwest Airlines Co. LUV in addition to JetBlue, but said Barclays suspects stronger leisure travel could be ready for take-off in the spring.

“While acknowledging some near-term fears on demand, the US consumer still appears relatively robust, likely to aid airline revenue outcomes later in 2019,” Oglenski wrote.

Price Action

Spirit stock was taking off Monday, up 2.4 percent to $52.98 per share. JetBlue was also trading up 2.4 percent to $16.48.

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Photo courtesy of Spirit Airlines.