Market Overview

Plane Change: Imperial Turns Bullish On American Airlines, Neutral On Southwest

Share:
Plane Change: Imperial Turns Bullish On American Airlines, Neutral On Southwest
Related
American Airlines, Morgan Stanley, Nordstrom, Gold: 'Fast Money' Picks For December 13
10 Biggest Price Target Changes For Thursday
Weak guidance sends Delta and peers lower (Seeking Alpha)
Related LUV
Jim Cramer Shares His Thoughts On CyrusOne, US Steel And More
Goldman Sachs Clears Airline Stocks For Takeoff

Imperial Capital changed course on airline stocks Friday by turning bullish on American Airlines Group Inc (NASDAQ: AAL) and downgrading Southwest Airlines Co (NYSE: LUV).

The Analyst

Imperial Capital's Michael Derchin upgraded American Airlines Group from In-Line to Outperform with a price target lifted from $49 to $56. Derchin downgraded Southwest Airlines from Outperform to In-Line with a price target lowered from $68 to $54.

Bullish On American Airlines

The bullish case for American Airlines' stock is based on expectations for the airliner to reduce capacity after the Labor Day period — a decision that should be "well received" by investors, Derchin said in the upgrade note.

The rationale behind such a move is threefold, the analyst said:

  • Higher fuel prices are pressuring margins, as the company is 100-percent unhedged against oil prices.
  • Weaker demand during the off-peak period could improve its pricing power.
  • Management bonuses are directly tied to the company achieving at least $3 billion in pre-tax income.

While it is difficult to value airline stocks given the inherent volatility in earnings and cash flows, non-traditional metrics like TEV/EBITDAR are more meaningful, the analyst said. Network airlines are typically valued at 4x to 7x during peak earnings periods, and American Airlines is likely in the "seventh inning" of the current cycle, he said. This implies room for further upside, Derchin said, as the $56 price target implies an 8.25x 2019E TEV/EBITDAR multiple.

No Longer Bullish On Southwest

Southwest is likely to face unit revenue pressures through fiscal 2019 and is poised to end flat in fiscal 2018, Derchin said in the downgrade note. The rationale behind this assumption is based on the following, the analyst said:

  • Expectations for mid-single digit capacity growth after Labor Day with the arrival of the 737-MAX, which will result in pricing pressure due to an "imbalance" in supply and demand.
  • Heightened competition in California.
  • Potential weakness in Denver.
  • The expansion to Hawaii in fiscal 2019 will likely prove to be dilutive to unit revenues for a few years.
  • A lack of global distribution system presence, which implies minimal exposure to the higher-yielding corporate market.

Southwest's stock still deserves to trade a premium to the group despite a "narrowed" cost advantage and fewer revenue opportunities due to not being a part of a GDS, the analyst said.

A TEV/EBITDA multiple of 7x is realistic and implies a price target of $54, according to Imperial. 

Price Action

Shares of American Airlines were up 1.1 percent premarket Friday, while Southwest Airlines shares were up 0.2 percent. 

Related Links:

'Our Economic Outlook For The Year Is Strong,' Delta CEO Says After Q1 Print

Airlines, Not Boeing, Take The Heat For Recent Airplane Malfunctions

Latest Ratings for AAL

DateFirmActionFromTo
Nov 2018CitigroupMaintainsBuyBuy
Nov 2018Credit SuisseInitiates Coverage OnNeutral
Nov 2018Morgan StanleyMaintainsEqual-WeightEqual-Weight

View More Analyst Ratings for AAL
View the Latest Analyst Ratings

Posted-In: airlines imperial capitalAnalyst Color Upgrades Downgrades Price Target Top Stories Analyst Ratings Best of Benzinga

 

Related Articles (LUV + AAL)

View Comments and Join the Discussion!

Latest Ratings

StockFirmActionPT
DLTRBernsteinUpgrades0.0
CNPUBSUpgrades34.0
UGIUBSDowngrades63.0
ATOUBSDowngrades106.0
CSCONomuraDowngrades50.0
View the Latest Analytics Ratings
Don't Miss Out!
Join Our Newsletter
Subscribe to:
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Fintech Focus
Your weekly roundup of hot topics in the exciting world of fintech.
Thank You
for registering for Benzinga’s newsletters and alerts.
• The Daily Analysts Ratings email will be received daily between 7am and 10am.
• The Market in 5 Minutes email will be received daily between 7am and 8am.
• The Fintech Focus email will be received every Friday between 2pm and 5pm.

Benzinga's Top Upgrades, Downgrades For June 1, 2018

Benzinga Pro's 5 Stocks To Watch Today