Airline stocks may run into some turbulence in the closing months of 2017. On Friday, JPMorgan analyst Jamie Baker downgraded the stocks of American Airline Group (AAL), United Continental Holdings (UAL) and Spirit Airlines (SAVE) from “outperform” to “hold” on fears that the airlines will be unable to hit earnings targets in the fourth quarter.
According to Baker, the earnings pressure these airline stocks are facing is self-inflicted as they battle for market share by lowering prices. That’s good news for airline investors in that pricing pressures are not necessarily a result of oversupply. In fact, Baker says some of the nation’s lowest fares are in major markets with some of the tightest supplies of seats.
One of the key measures of operating efficiency for airlines is passenger revenue per available seat mile, or PRASM. Wall Street analysts are expecting a sequential improvement in PRASM in the fourth quarter, but Baker says historical data suggests PRASM will likely decline instead.
“While stocks have corrected meaningfully since last earnings season, we fear they may not be braced for the magnitude of Q4 disappointment we anticipate,” Baker wrote.
Despite potential earnings headwinds, Baker says the recent sell-off in airline stocks has created several value opportunities for selective investors willing to ride out the storm. Baker says none of the airline stocks are currently “crazy cheap,” based on 2018 and 2019 earnings projections, but some are more attractive than others.
In addition to the downgrades, JPMorgan upgraded Southwest Airlines Co. (LUV) from “hold” to “outperform” based on the stock’s discounted valuation. JPMorgan is also bullish on Delta Air Lines (DAL), Alaska Air Group (ALK) and JetBlue Airways Corp. (JBLU).
“LUV has approached…
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