Michael Linenberg, Deutsche Bank's analyst that covers the U.S. airline sector, commented in a note that shares of American Airlines Group Inc AAL, Delta Air Lines, Inc. DAL and Copa Holdings, S.A. CPA are all trading at "attractive" entry-points relative to his 12-month price targets of $50, $50 and $65, respectively. As such, all three names were upgraded to Buy from Hold.
According to Linenberg, second half 2015 and 2016 earnings per share estimates could prove to be too conservative following energy price declines throughout the summer. The analyst added that while PRASM (passenger revenue per available seat mile) will likely remain under pressure, fuel surcharges could more than offset an even greater decline in PRASM than what is currently expected.
In fact, jet fuel is now about $0.50 per gallon below the analyst's forecast and if it were to stay steady for the remainder of the year, industry-wide PRASM could decline by another 400 basis points and present industry earnings forecasts would remain intact.
Linenberg also noted that major airline stocks are trading at 9.4x his 2015 earnings per share estimate and 9.0x his 2016 earnings per share estimate, below their historical range of 10x-12x.
"We think recent headline concerns (e.g. PRASM weakness, unresolved labor contracts, DOJ/DOT investigations) are to blame for the lagging multiples," Linenberg argued. "However, these issues will not prevent the US airlines from moving up the investor suitability curve as long as they continue to implement pro-shareholder initiatives such as share repurchases, dividend declarations, and pay down debt."
Finally, Linenberg argued that airlines are now "getting more respect from the market" as evidenced by United Continental Holdings Inc UAL's inclusion in the S&P 500. The analyst also acknowledged his own valuation metrics are "conservative" while at the same time "adequately" accounting for present macro and micro concerns.
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