Airlines Have More Room To Run

Airline stocks have surged since mid-August on higher bookings, signs of improved capacity discipline in 2017, Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B)'s surprise investments in the sector and a post-election rally in cyclical stocks, Imperial Capital’s Michael Derchin said in a report. He commented that airline shares still appeared “relatively attractive using 2018 estimates.”

Berkshire Hathaway recently purchased stakes in the four largest U.S. airlines: Southwest Airlines Co (NYSE: LUV), American Airlines Group Inc (NASDAQ: AAL), United Continental Holdings Inc (NYSE: UAL) and Delta Air Lines, Inc. (NYSE: DAL).

Positive On The Group

Despite the recent run up in U.S. airline stocks, with the XAL Airline Index gaining more than 20 percent year-to-date and reaching a 52-week high on November 21, “we still have a positive view on the group, and would use any pullbacks in prices to add to or initiate new positions in the shares of our favorite ideas – domestically focused, lower cost carriers,” Derchin mentioned.

He named Hawaiian Holdings, Inc. (NASDAQ: HA), Spirit Airlines Incorporated (NASDAQ: SAVE), JetBlue Airways Corporation (NASDAQ: JBLU), Allegiant Travel Company (NASDAQ: ALGT) and Southwest Airlines as top picks in the sector.

Price Targets Raised

The analyst raised the one-year price targets based on 2018 estimates.

• Allegiant: Outperform, price target raised from $160 to $196.
• American Airlines: In Line, price target raised from $43 to $49.
• Delta Air Lines: In Line, price target raised from $44 to $52.
• Hawaiian Holdings: Outperform, price target raised from $62 to $66.
• JetBlue Airways: Outperform, price target raised from $23 to $26.
• Southwest Airlines: Outperform, price target raised from $46 to $57.
• Spirit Airlines: Outperform, price target raised from $58 to $68.

Derchin downgraded the rating on United Continental from Outperform to In Line, while raising the price target from $65 to $76. He maintained In-Line ratings for Alaska Air Group, Inc. (NYSE: ALK) and Virgin America Inc (NASDAQ: VA), while reiterating their price targets at $84 and $57, respectively.