Seaport Global initiated coverage of seven airliners, three of which should be bought by investors.
Daniel McKenzie initiated coverage of the following airliners:
- Alaska Air Group, Inc. ALK at Buy, $53 price target.
- Allegiant Travel Company ALGT at Buy, $166 price target.
- Azul SA AZUL at Neutral, no price target.
- Copa Holdings, S.A. CPA at Neutral, no price target.
- Delta Air Lines, Inc. DAL at Buy, $43 price target.
- Gol Linhas Aereas Inteligentes SA GOL at Neutral, no price target.
- Hawaiian Holdings, Inc. HA at Neutral, no price target.
The Thesis: The airline industry is showing early signs of a recovery, although "weak" ones, McKenzie wrote in a note. The combination of fleet simplification, cost restructuring, and a focus on core network strengths is enough to kickstart a durable profit recovery.
Airliners will be in a position to start their "balance sheet repair" initiatives but a more material recovery hinges on the success of a coronavirus vaccine, the analyst wrote.
Alaska Air: If Alaska Air is 20% smaller in size and scope by summer 2021, the company should still be able to generate a "small" full-year profit and beat consensus estimates.
Beyond 2021, the company can leverage its new alliance with OneWorld, share gains at key hubs, and a new basic economy product to show a strong financial recovery.
Allegiant: Allegiant should show a solid earnings growth story in a post-COVID-world, especially for airliners that focus on leisure travel. The company's focus on operational improvements should offer comfort for investors concerned with costs moving forward.
Delta: Consensus estimates are "under-appreciating" Delta's ability to recover from the pandemic and show strong earnings and free cash flow metrics. The company continues to right-size its network and streamline its cost structure to become a more profitable and efficient airliner.
Delta controls a 70% or greater market share at four of its five hubs and this gives it a structural revenue advantage over its peers, the analyst wrote. The company ended the second quarter with around $16 billion in liquidity and this implies it's in "better shape" versus current investor sentiment.
Azul: Shares of Brazil-based Azul gained more than 200% from its 52-week lows and for good reason. The company deserves credit for cost restructuring, fleet transformation, a new codeshare with domestic competitors, a push into the higher-margin cargo business, among others.
But investors should hold a cautious stance ahead of a potential capital raise that would be costly and create equity dilution.
Copa: Copa operates a hub and airline out of Panama City and is considered the "best house in a rough neighborhood," the analyst wrote. The company is among the best from an operational and financial perspective and has plenty of long-term upside but in two to three years.
In the meantime, signs of a more visible demand recovery in the region are needed before turning bullish on Copa.
Gol: Gol is a low-cost Brazilian airliner that is winning market share from a key competitor undergoing Chapter 11 reorganizations, the analyst wrote. Once demand normalizes, Gol will be in a better position to serve the sixth-largest domestic aviation market in the world.
The company faces near-term concerns, including reports of a capital raise and a sigma of operating in a "bad neighborhood."
Hawaiian Holdings: Hawaiian continues to face competitive and margin challenges and investors can find other airline stocks that offer better risk to reward profiles, the analyst wrote. The company offers one of the smallest and least diversified networks in the airline industry as it relies on one single hub in Honolulu.
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