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United Airlines Stock Got Bullish Comments from Morgan Stanley

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May. 22 2019, Published 8:51 a.m. ET

Rating upgrade

On May 20, United Airlines (UAL) received bullish comments from Morgan Stanley (MS), which believes the stock has tremendous upside potential. Morgan Stanley analyst Rajeev Lalwani upgraded the rating on the stock to an “overweight” from an “equal weight” and increased its target price by $9 to $110.

Lalwani seemed to be optimistic about UAL’s mid-US expansion plans and its executions, which he believes are already paying off, as is reflected in the company’s previous financial results. He also thinks the company will continue to benefit from its cost-cutting measures and loyalty programs.

Given UAL’s expansion plans along with the benefits of its loyalty programs and cost-containment initiatives, Lalwani believes the company will achieve its 2020 EPS target. During an investor update on April 16, the company said it expects its EPS in 2020 to come in between $11 and $13.

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In a note to clients, Lalwani wrote, “Over the last 12-18 months, United has done a solid job of executing on its mid-continent strategy, which we foresee continuing as the competitive backdrop remains benign in a high cost environment,” CNBC reported on May 20. He added, “With opportunities around the loyalty program (of 1-2 points on RASM) and largely stable costs (CASM-Ex Fuel up ~0.5% 2019 / 2020), we believe the 2020 EPS target has a higher probability of being met, thus we shift our estimates to the upper-end of guidance ($11-13 in EPS).”

United Airlines’ peers

On the contrary, Lalwani downgraded his ratings on UAL’s two major competitors, American Airlines (AAL) and Delta Air Lines (DAL), on May 20. Citing labor risks and probable cost concerns, the analyst downgraded AAL to an “underweight” from an “equal weight.” Lalwani stated that AAL would have to renegotiate contracts with ~70% of its workforce in the next 6–18 months, which would increase its costs significantly, thereby weighing on its 2019 and 2020 earnings.

For DAL, Lalwani cited concerns about its elevated capex and its falling cash flow yield as the major reason behind the rating downgrade. The analyst lowered his rating on the stock to an “equal weight” from an “overweight.”

The US Global Jets ETF (JETS) has allocated a cumulative 36.8% of its fund in UAL, AAL, and DAL. The ETF invests in US and non-US airlines, aircraft manufacturers, and airport and terminal services stocks. However, the ETF’s year-to-date return of 6.5% is lower than the Dow Jones Industrial Average’s and the S&P 500 Index’s gains of 10.9% and 14.3%, respectively.

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