Passengers waiting for a flight at an international terminal at John F. Kennedy Airport in New York.
Spencer Platt/Getty Images
Airline stocks were flying on Monday on encouraging developments in the battle against Covid-19. Wall Street is turning bullish again.
Deutsche Bank’s Michael Linenberg upgraded the entire sector to a Buy on Monday. While the stocks are looking pricey, the sector could see “material upside from current levels” as virtually every carrier participates in a demand recovery, he wrote.
The U.S. Global Jets exchange-traded fund (ticker: JETS) was up 4.6%, flying well above the S&P 500, which was down 0.8%. An engine failure on a United Airlines Holdings (UAL) jet over the weekend doesn’t appear to have damped enthusiasm for that stock either. United was ahead 6.6%, to around $51.
The stocks appear to be rallying on more encouraging pandemic news. New cases and hospitalizations are falling sharply as vaccine distribution ramps up. The 14-day average of new cases was down 44% to 55,000 on Feb. 21. About 44 million people have received at least one vaccine dose in the U.S., and 1.5 million doses of vaccine are being administered daily.
Studies out of Israel, where more than a third of population has been inoculated, also indicate that vaccines do a good job of controlling the spread. Israeli researchers also reported over the weekend that the Pfizer /BioNTech vaccine was nearly 90% effective at preventing new infections.
New strains of the virus remain a threat to the recovery and are likely depressing international travel as many countries retain travel bans and quarantine rules. But investors seem to be betting that consumers will soon start booking travel for the spring and summer.
Airlines are also supporting international contact-tracing programs and digital immunity passports that would enable consumers to book international flights to many destinations and avoid strict quarantine rules upon arrival.
Linenberg’s upgrade comes about two months after he downgraded the entire sector to a Hold. His argument back in December was that the stocks had already rallied sharply and were trading at or near “fair value,” based on 2022 estimates and in some cases 2023 forecasts.
Valuations remain steep, especially for low-cost domestic carriers that are benefiting most from the recovery. According to Linenberg, carriers like Southwest Airlines (LUV), Spirit Airlines (SAVE), Allegiant Travel (ALGT), and JetBlue Airways (JBLU) trade at an average of 16 times estimated 2021 Ebitdar (earnings before interest, taxes, depreciation, amortization, and rent).
But he argues that valuations always look extreme in the early stages of a recovery. Investors tend to focus on metrics such as rebounding flight capacity, passenger volumes, cost controls, and cash generation. The sector could start to attract more investors as the fundamentals improve. And the stocks should eventually price in earnings growth and balance-sheet deleveraging, which he says should be “unprecedented” in this cycle.
But investors shouldn’t expect big gains at this juncture. Most of Linenberg’s price targets are less than 20% above the stocks’ recent prices. He sees Spirit hitting $44, up from recent prices around $37. His price target on Southwest is $64, up from around $55. Delta Air Lines (DAL) is worth $55, in this view, up from a recent $48.
Write to Daren Fonda at [email protected]
