As the ten-year bull market comes to an end, some of the worst performers in recent years are starting to outshine the broader market. The airline industry, which hasn’t been the most exciting group of stocks to watch, is now more investable than ever according to one team of bulls on the Street.
Airline Sector Stronger Than Ever After ‘Historic Restructuring’
In a note to clients on Monday, Credit Suisse analyst Jose Caiado initiated coverage on the sector with an “overweight” rating. While bears have warned on the possibility of higher capacity driving down seat prices, as well as increased oil prices eating into profits, according to Caiado these concerns are overblown.
While recent earnings reports demonstrate the resilience of the airline industry, investors have failed to applaud the sector in recent quarters, with many major players underperforming the S&P 500 YTD at large. Caiado, on the other hand, has rated Delta Air Lines (DAL), United Continental Holdings (UAL), and Alaska Air Group (ALK) at “outperform.”
Credit Suisse writes that while airlines are still cyclical, the sector’s investment profile has “significantly improved relative to prior cycles,” and that after a “very challenging decade in the 2000s,” the industry has gone about a “historic restructuring.”
Caiado cites the industry’s focus on returns, “vastly improved” balance sheets, a “resurgence” of capacity discipline, improved top-line numbers, and shareholder-friendly moves, which positions companies to be able to weather a market recession or a sharp increase in fuel prices. Meanwhile, continued strength in demand should help to expand margins for the first time since 2015.
The Credit Suisse analyst even views higher oil prices, seen as a headwind for the industry, as a positive for some airlines. “Higher input costs will force capacity discipline back into the market at the same time that it reinvigorates the focus on the top line,” Caiado writes, adding that airline companies can push through fare hikes in 2019.
Winners and Losers
According to Caiado, Delta is “too cheap to ignore.” The Credit Suisse analyst is upbeat on United’s turnaround, which he says the firm is executing “ahead of plan.” Credit Suisse expects Delta stock to gain more than 28% over the next 12 months to reach $71. Closing down 1.4% on Tuesday at $55.41, Delta shares reflect a 1.1% loss in 2018, roughly in line with the broader S&P 500’s loss.
United, alongside Spirit Airlines (SAVE), has actually generated outsized returns for investors this year, up 36.2% YTD. Caiado’s $113 price target implies a 23.1% upside from current levels. Credit Suisse’s $81 price forecast for Alaska Air stock, Caiado’s “top pick” of the group, reflects a near 21% upside.
But Caiado isn’t as bullish on all U.S. carriers. The analyst rated JetBlue Airways (JBLU) at “underperform” due to overblown optimism for 2019 margin expansion and tough comparable sales in the first half of 2019.