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All Contents © 2019The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| February 18, 2019
The airline industry would probably rather forget 2018. Most airline companies ended the year in the red as investors worried about high oil prices cutting into profits.
The same can’t be said for 2019. Oil prices are now down to just over $55 from their peak above $75 back in October 2018. And airline stocks have started the year on a strong note with a solid round of earnings.
As a result, shares are now beginning to gain momentum again. That’s despite the partial government shutdown, which Delta Air Lines (DAL) CEO Ed Bastian estimated cost the company $25 million in revenue for January.
“The industry continues to benefit from strong demand as Airline stocks across the board have reported better-than-expected results in their most recent quarter,” top Tigress Financial analyst Ivan Feinseth writes. He says a strong economy, low unemployment and increases in consumer spending are driving record levels of airline travel. Not to mention these companies are sharpening their operations to squeeze out maximum gains when the going gets good.
Which stocks should you be watching? Here, we use TipRanks market data to pinpoint analysts’ favorite airline stocks now:
Data is as of Feb. 15.
Market value: $2.9 billion
TipRanks consensus price target: $66.50 (19% upside potential)
TipRanks consensus rating: Moderate Buy
SkyWest (SKYW, $55.68) is the holding company for large regional aircraft operator SkyWest Airlines. It boasts a fleet of nearly 500 aircraft connecting millions of passengers each month to more than 250 destinations throughout the U.S.
The airline operates under various names: Alaska SkyWest for Alaska Air Group’s (ALK) Alaska Airlines, American Eagle for American Airlines (AAL), Delta Connection for Delta and United Express for United Continental’s (UAL) United Airlines.
After losing 15% in 2018, shares have rebounded 25% year-to-date and have a host of tailwinds.
Notably, SkyWest has announced several significant fleet changes that will occur over the next few years. The company will purchase nine new Embraer E175s (five in 2019 and four in 2020) and will operate them for Delta. The E175s will replace CRJ900s that will be removed from service.
Five-star Cowen & Co. analyst Helane Becker – who holds a top-25 ranking among the 5,000 analysts tracked by TipRanks – approves of SKYW’s fleet transition strategy. “The outlook for SkyWest remains favorable as the company continues to shed under-performing assets and focuses on its larger regional jets,” writes Becker, who recently boosted her price target on the stock from $61 to $64 – 15% upside from current prices.
As a result of selling its ExpressJet division, the company will see some revenue contraction, but the quality of revenue and earnings will continue to improve, writes Becker, who rates SKYW at “Outperform” (equivalent of “Buy”). Plus, “The changes announced by the company mean that 80% of their fleet is committed through 2020.” For more information on SkyWest’s shares, get a free SKYW Research Report from TipRanks.
Market value: $8.2 billion
TipRanks consensus price target: $80.60 (22% upside potential)
TipRanks consensus rating: Strong Buy
Washington-based Alaska Air Group (ALK, $66.32) is the fifth-largest airline in the U.S. Shares have recovered 9% year-to-date after losing 31% across 2017 and 2018.
Is the turnaround set to last?
Analyst Michael Derchin of Imperial Capital is confident that ALK has a long growth trajectory ahead. He called the stock one of his top ideas, “considering strong unit revenue growth likely through FY20, resulting in margins among the top-tier in the industry.”
Derchin estimates unit revenue growth of 3.5% in fiscal 2019 and 1.5% in FY20, versus roughly 1.5% and 1% for the industry, respectively, resulting in margins reaching the upper tier of the industry by 2020. That informs his bullish price target of $90 (for 36% upside potential).
Macquarie’s Susan Donofrio also struck a confident note on ALK with a rating upgrade (from “Hold” to “Buy”) and a $76 price target (15% upside). She has “more confidence in our revenue forecast for Alaska as revenue momentum is kicking in nicely in the Company’s established markets (longer than a year), with revenue drag contained within its newly launched service that represents only 3% of its markets.”
Bottom line: Donofrio expects 2019 will be a better year for Alaska thanks to lower crude oil prices and an upbeat revenue outlook. For further stock insights, turn to TipRanks’ ALK Research Report.
Market value: $4.2 billion
TipRanks consensus price target: $76.17 (24% upside potential)
Ultra-low-cost airline Spirit Airlines (SAVE, $61.67) has seen shares surge by 55% over the last year, and Raymond James analyst Savanthi Syth thinks SAVE can reach higher altitudes.
“We continue to believe impressive cost discipline, ancillary revenue initiatives, and tactical network adjustments will continue to support earnings recovery at Spirit,” writes Syth, who has a “Strong Buy” rating on SAVE with an $80 price target (30% upside).
Derchin recently hiked his price target on SAVE from $90 to $92 (50% upside) after the company raised its first-quarter total revenue per available seat mile (TRASM, an important airline operating metric) forecast to 5% year-over-year growth. That feat would be particularly impressive given the initial drag of new international markets, as well as Easter shifting from Q1 in 2018 to Q2 in 2019.
Overall, Derchin gives six key reasons in support of SAVE stock: 1.) annual capacity growth of 15% to 16% through FY20; 2.) expected increase in non-ticket revenue per passenger to $56 to $57 in FY19; 3.) new growth initiatives including a new website and frequent flier program; 4.) improved IT capabilities; 5.) stronger cost controls; 6.) and increased operational efficiency and reliability.
It’s little surprise, then, that Spirit boasts a consensus “Strong Buy” rating from Wall Street right now. Find out what other analysts think of this airline stock in TipRanks’ SAVE Research Report.
Market value: $31.9 billion
TipRanks consensus price target: $63.20 (28% upside potential)
The world’s largest low-cost carrier is looking like an attractive investing opportunity right now. Unlike Spirit Airlines, Southwest Airlines (LUV, $57.50) focuses on offering all-inclusive fares, which means passengers don’t have to shell out for extras like luggage and entertainment.
“We reiterate our Buy rating on LUV as its unique value proposition along with strong industry trends continue to drive accelerating Business Performance,” cheers Tigress’ Feinseth. The analyst has a 100% success rate on LUV alongside a 7.2% profit per rating.
Feinseth is looking for another record year in 2019 driven by Southwest’s upcoming Hawaiian route additions, then more growth initiatives coming online in 2020. Meanwhile LUV’s ability to manage costs and improve operating efficiency gives it a competitive cost advantage.
“LUV’s forty-five-year history of profitability together with its strong balance sheet, disciplined capital deployment, and commitment will continue to drive higher Returns on Capital,” the analyst writes.
Feinseth doesn’t offer a price target but says, “We believe further upside exists from current levels and continue to recommend purchase.” Find out more from TipRanks in its LUV Research Report.
Market value: $16.7 billion
TipRanks consensus price target: $46.89 (28% upside potential)
Major carrier American Airlines (AAL, $35.05) suffered an abysmal 2018, with shares plunging 38% across the year. But with prices so low, has this airline stock – a current favorite of Oakmark Fund (OAKMX) manager Bill Nygren – become an attractive opportunity?
The company made a strong argument in its own favor with its Q4 earnings report. Adjusted earnings of $1.04 per share beat the analyst consensus expectation for $1.01. Guidance for 2019 profits, at $5.50 to $7.50 per share, also came in higher than the Street anticipated. That has prompted a 9% bump in shares so far this year.
Following the earnings report, Cowen & Co.’s Becker reiterated her “Outperform” rating on AAL and her $43 price target, which translates into another 23% in potential gains ahead.
She believes that “2019 is setting up to be a good year.” Becker says that the company’s upbeat revenue guidance puts American ahead of rival giants Delta and United for the year ahead, and indicates a key reversal from the company’s 2018 underperformance.
Also noteworthy: Imperial Capital’s Derchin ramped up his price target on AAL from $42 to $46 (31% upside) following the report. Like Becker, Derchin cited American’s strong earnings outlook. He sees upside potential for earnings and unit revenues, and thinks AAL’s valuation suggests that expectations are low (and thus easily achievable).
Check out other analyst targets for American in TipRanks’ AAL Research Report.
Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.