Stephens’ Jack Atkins initiated coverage of the US passenger airline industry with a positive bias, stating that structural changes over the last ten years had created an operating environment in which legacy airlines could remain profitable through an economic cycle.

“We look for group valuation multiples to move higher as the airlines prove out the sustainability and profitability of their business models. That said, given the uncertain macroeconomic backdrop and the potential for fuel volatility, we prefer high-quality, proven operators with solid balance sheets,” analyst Jack Atkins wrote.

Despite the improved operational scenario and financial stability in the airlines industry, valuation multiples remained below that of other transportation modes. Atkins expects this to change over time.

Delta Air Lines

Stephens initiated coverage of Delta Air Lines, Inc. (NYSE: DAL) with an Overweight rating and a price target of $65. Delta Air Lines is a high quality company, while its shares are trading like a junk bond, Atkins said. Management had transformed the company into an industry-leading legacy airline after its bankruptcy and merger with Northwest Airlines.

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The company’s strengths lie in its unique variable cost model, efficient labor force and its retention and prudent usage of older unencumbered assets. Delta Air Lines’ current stock valuation does not reflect the company’s exceptional performance history and robust balance sheet, the analyst commented.

Southwest Airlines

Atkins initiated coverage of Southwest Airlines Co (NYSE: LUV) with an Overweight rating and a price target of $60. He said that the company is a best-in-breed carrier with a proven management team and a differentiated business model which focuses on providing the best customer service experience at a low price.

Atkins expects Southwest Airlines’ strategic plan to drive significant earnings growth over the next several years. The company’s current stock valuation is attractive and may expand further as the company executes its various growth initiatives.

American Airlines

Stephens initiated coverage of American Airlines Group Inc (NASDAQ: AAL) with an Equal-Weight rating and a price target of $43. Atkins said that the company was the last of the legacy airlines to file for bankruptcy and close a merger, positioning it behind its peers from an integration and operational efficiency angle.

American Airlines is in the early stages of its integration and has captured about half of the expected synergies. American Airline’s investments in its networks are yet to yield the desired results, the analyst mentioned.

United Continental Holdings

Atkins initiated coverage of United Continental Holdings Inc (NYSE: UAL) with an Equal-Weight rating and price target of $64. The company is in the early stages of improving its network via investments in fleet and through its new high-margin service offerings to customers.

United Continental’s service metrics lagged behind peers following the integration with Continental Airlines, the analyst noted. He added that although the company had taken steps to improve its service metrics, the absence of a strategic plan remained a concern area.

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