Airline stocks could climb 70% as the hard-hit sector recovers from the pandemic, Jefferies says

Flying on American Airlines during pandemic
Flying on American Airlines during the pandemic.

  • Airline stocks could advance by another 70% after their 30% rise so far in 2021, said analysts at Jefferies.
  • American Airlines was upgraded to a hold rating from underperform as part of a look at the sector.
  • Commodity inflation is something to watch as a pressure point for earnings but currently works as a “tailwind”.
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Airline stocks look set to fly up by another 70% as route changes, relatively lower oil prices and other structural considerations help guide the sector’s recovery from the coronavirus crisis, says Jefferies.

The financial services firm outlined its view on Tuesday in a note examining the implications of rising multiples after a collective 30% gain in shares of airlines in its coverage group. Airline shares have risen in recent months as part of a broader ramp-up in business activity spurred by COVID-19 vaccinations and fiscal stimulus that includes $1,400 checks now being sent to most Americans.

“The consensus view around air traffic is that 2023 looks very similar to 2019, with domestic fully recovered and international largely returning to pre-COVID levels,” the financial services firm wrote.

The S&P 500 Airline Index rose nearly 3% during Tuesday’s advancing about 31% this year. The US Global Jets ETF picked up 2.5% during the daily session and has picked up roughly 21% so far in 2021.

Considering factors including productivity improvements alongside a partial offset from net debt changes, “airlines currently trade at a 4.3 times multiple on the bull case scenario versus a historical average of 6X, implying ~70% potential upside across the group,” said Jefferies equity analysts led by Sheila Kahyaoglu.

Jefferies raised its price target on Delta Air Lines to $50 from $40, its target on Southwest Airlines to $70 from $55, and its target on United Airlines to $60 from $55.

Jefferies said commodity inflation is a “watch item” as a potential headwind to 2023 earnings for airlines, but that it’s currently a “tailwind” compared with 2019, before the pandemic emerged. “Despite the recent rise, the futures price for Brent delivery in Dec 2023 remains at ~$56, below Dec 2019 prices of ~$60” per barrel.

Jefferies’ examination included a rating upgrade for American Airlines stock to hold from underperform. It said American is best positioned to pass costs to consumers as the sole operator on 37% of its routes compared with 29% at Delta and 21% at United.

Meanwhile, American’s partnerships with JetBlue Airways and Alaska Air include a strategic exit from some less profitable routes in the Northeast and Northwest and the changes have the potential to drive total revenue up by 2.3% to $46.8 billion in 2023 from 2019.

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