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Delta Air Lines Fell Due to Rating Downgrade by Morgan Stanley

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Rating downgrade

Delta Air Lines (DAL) shares fell slightly more than 1% on May 20 after Morgan Stanley (MS) lowered its rating on the stock. However, the research firm stated that it isn’t bearish on the stock. Morgan Stanley adjusted its rating and target price after looking at Delta Air Lines’ valuation.

Morgan Stanley analyst Rajeev Lalwani pointed out that the stock currently trades at a premium valuation compared to most of its peers. The stock has reached a mature valuation, according to CNBC. Lalwani thinks that Delta Air Lines stock’s YTD (year-to-date) gain of 8.8% is higher than most of its peers, which have registered negative or flattish returns.

Lalwani thinks that at the current market prices, Delta Air Lines stock is trading at an appropriate multiple of ~9x compared to its historical 9x–10x range. He also thinks that the company’s valuation has reached maturation and is higher than the industry average of ~8x.

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Lalwani discussed that concerns about Delta Air Lines’ elevated capital expenditure plans and falling free cash fall yield were some other reasons for the downgrade. The analyst downgraded the rating on Delta Air Lines stock to “equal-weight” from “overweight” and lowered the target price by $1 to $61.

Delta Air Lines’ peers

Lalwani also downgraded American Airlines (AAL) to “underweight” from “equal-weight.” The company poses the highest labor risk among US airlines. He thinks that American Airlines assuming its overall costs will likely hurt its earnings in 2019 and 2020. In a note to clients, Lalwani said that the company would have to renegotiate the labor contract with ~70% of its workforce in the next six to 18 months, which will likely result in higher overall costs. The analyst cut the target price on the stock by 35% to $26.

Lalwani upgraded United Airlines (UAL) to “overweight” from “equal-weight” and raised the target price to $110 from $101. He is optimistic about the company’s mid-US expansion plan executions, which have already been paying off—as reflected in the last quarterly results.

Delta Air Lines stock’s YTD gain has outperformed the returns of the US Global Jets ETF (JETS), which has risen 5.1%. The ETF invests in US and non-US airlines, aircraft manufacturers, and airport and terminal service providing stocks.

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