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Morgan Stanley Upgrades American Air To Overweight, Joining Delta And United

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Shares of legacy airline carriers are down around 15 percent YTD, with most of the pressure coming in recent weeks on disappointing outlooks. Morgan Stanley’s Rajeev Lalwani said that there was reason to stay positive, although the outlooks were clearly disappointing. While stocks are down, there is hope of unit revenues stabilizing.

“The downside surprise to the guides were, in our view, simply the result of supply exceeding demand, which includes corporate bookings being flattish, leisure travel strength from lower fares, and the domestic supply deceleration not keeping pace,” analyst Rajeev Lalwani wrote. He added, however, that pricing is likely to be closer to flat into 2017, with domestic capacity reducing 3.0-3.5 percent and the backdrop becoming more supportive.

American Airlines

Lalwani upgraded the rating for American Airlines Group Inc (NASDAQ: AAL) from Equal-weight to Overweight, while reducing the price target from $48 to $46. He believes the company is most levered to an improving backdrop and the stock’s relative risk-reward had improved.

American Airlines still has “the best revenue story in the industry,” the analyst mentioned, while adding that the company’s fleet reinvestment cycle was maturing while peers were ramping, which suggests that FCF yields over the coming years would be “closer to parity in the mid-teens.”

Delta Air Lines

Morgan Stanley has an Overweight rating for Delta Air Lines, Inc. (NYSE: DAL). The price target has been reduced from $65 to $59. Although the company is best in class, there are risks.

While Delta Air Lines generates above-average margins and has an investment grade balance sheet, the concerns areas including rising risks related to its Europe exposure via higher supply, “a likely rising capex profile from potential aircraft orders (to $3.0-4.0B), and its indefinite positive PRASM timeline,” Lalwani said.

United Continental

Morgan Stanley has an Overweight rating for United Continental Holdings Inc (NYSE: UAL). The price target has been reduced from $67 to $58. Lalwani wrote, “Our conviction has somewhat deteriorated, though we still see a long-term opportunity to close the margin gap.”

Labor step ups, higher capex, and exposure to Asia, Europe and Energy would make it tough for the company to close the margin gap for several years to come. The analyst added, however, that there were no structural impediments to achieving that, and the important steps include labor unification, Board adjustments, and fleet investments.

“In regard to valuation, we note that the airline is still positioned to be the industry leader on FCF even post higher capex,” the report stated.

Latest Ratings for AAL

DateFirmActionFromTo
Jun 2020Seaport GlobalInitiates Coverage OnBuy
Jun 2020CitigroupMaintainsSell
Jun 2020Raymond JamesDowngradesMarket PerformUnderperform

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