Analysts are cutting their 2021 airline revenue forecasts, pushing out recovery estimates to the second half of the year.
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It may be time to take profits in airline stocks.
The sector has soared since early November—rising on vaccine hopes and revenue recovering sharply next year. Many of the stocks now trade near or above Wall Street’s price targets. And if you buy now, it would be on hopes that their multiples would expand or that revenue forecasts beat current estimates handily.
Those aren’t good-enough reasons for JPMorgan’s Jamie Baker. He recommends “selective profit-taking” in the sector and he has turned bearish on stocks that he previously recommended. Baker downgraded three carriers from Outperform to Underperform ratings: JetBlue Airways (JBLU), Spirit Airlines (SAVE), and United Airlines Holdings (UAL). He reiterated Underperform ratings on American Airlines Group (AAL) and Southwest Airlines (LUV), and kept Buys on Air Canada (AC.TSE), Alaska Air Group (ALK), and Delta Air Lines (DAL).
Baker isn’t the only analyst turning bearish. Deutsche Bank downgraded the entire sector last week. The surge in coronavirus cases is leveling the industry again. Airlines have been cutting capacity, relying almost entirely on leisure travel as corporate and international remain deeply depressed. Vaccines are coming, but not soon enough to lift January revenue, which is also looking weaker. Analysts are now cutting their 2021 revenue forecasts, pushing out recovery estimates to the second half of the year.
The stocks are now trading on 2022 estimates, but they are already pricing in an immense rebound. Baker notes that his price targets assume a recovery to 87% of 2019 revenue, which is above consensus estimates. And even that may be a stretch, because there is still “significant uncertainty” around corporate travel, he notes, with many companies adopting new virtual-work policies.
American’s stock, at around $16.70 a share, looks particularly overvalued. Based on 2022 forecasts, it is trading at 8 times enterprise value to Ebitdar (earnings before interest, taxes, depreciation, amortization, and rent), Baker estimates. That makes it the priciest stock in the sector, towering over Delta, United and Southwest, all around 6 times EV/Ebitdar.
American would need to add $2 billion in Ebitdar to current estimates, taking it to $7.3 billion, to push its multiple down to the industry average around 6. That implies the company would have to beat current forecasts by 36%. Even then, the profit gains imply just 17% upside in the stock, Baker estimates, to around $19.50 a share.
Delta may have more to gain without taking its multiple through a gymnastics exercise. Baker sees the stock hitting $51 on a multiple of 6.5 times 2022 Ebitdar, or 10 times earnings per share. The airline is well-managed and earns the highest margins of any full-service legacy carrier. It also has the strongest balance sheet of the group—though Southwest’s is better. And it is in a good spot to take market share and lift margins as the recovery plays out.
Alaska could also be a winner, gaining 29% from recent prices to $64, according to Baker. He arrives at that target on a 6.5 multiple of EV/Ebitdar and a price/earnings ratio of 9.5 times 2022 profit. Alaska’s balance sheet and liquidity look solid, and the airline has a strong competitive position in its core Pacific Northwest market. It also operates a relatively young fleet of fuel-efficient aircraft and signed a partnership with American this year on code-sharing of flights, which could help both airlines.
Write to Daren Fonda at [email protected]
