Airlines to take off in 2019
With few exceptions, airline stocks (JETS) have been among the worst performers this year due to concerns about seat capacity affecting prices and rising oil prices eroding profits. However, Jose Caiado, an analyst at Credit Suisse (CS), believes that concerns are overhyped. He expects airline stocks to surge in 2019.
Initiating coverage with an “overweight” rating on the industry, Caiado wrote a note to clients on November 19, stating, “Investment profile has significantly improved relative to prior cycles, following a very challenging decade in the 2000s that brought about a historic restructuring of the industry,” Barrons reported. Caiado said that the companies in the space are focusing on improving their balance sheets and maximizing returns, top-line growth, and shareholder-friendly moves, which have made them capable of weathering a market recession or sharp increase in fuel prices.
Moreover, Caiado has a different view than most other analysts and believes that higher oil prices are positive for some airlines. Investopedia quoted Caiado saying, “Higher input costs will force capacity discipline back into the market at the same time that it reinvigorates the focus on the top line.”
He also said that oil prices will be relatively stable while robust air travel demand will provide air carriers an opportunity to raise fares. Plus, Caiado believes strong travel demand, increased sales, and cost efficiency will help the industry with margin expansion in 2019 for the first time since 2015.
Caiado’s views on 2019’s margin expansion match Goldman Sachs’ (GS) analyst Catherine O’Brien’s. She also believes strong revenue growth trends and cost controls will push airlines’ margin expansion next year despite a surge in fuel prices.
These three stocks to outperform
Caiado has “outperform” ratings on United Continental (UAL), Delta Air Lines (DAL), and Alaska Air Group (ALK) with price targets of $113, $71, and $81, respectively. Justifying his ratings on these stocks, the analyst said UAL’s turnaround efforts have been remarkable and ahead of plan. For DAL, Caiado believes the stock is “too cheap to ignore” while ALK is his top pick in the group. On November 21, Caiado’s price targets for UAL, Dal, and ALK reflect returns of 21.7%, 26.9%, and 18.2%, respectively.
In this series, we’ll take a look at the impact of oil prices on these three stocks, highlights their recent quarterly performance, valuations, ratings, and share price performance.