Wall Street Says Sell American Airlines Stock and Buy It -- on the Same Day -- Barrons.com
Dow Jones Newswires | July 08, 2019 10:48:00 AM ET
Two Wall Street firms have conflicting views on American Airlines ahead of second-quarter earnings. One says sell the stock, and the other says buy.
That may make it confusing for investors, but there is good news for investors seeking airline exposure. Both brokerage firms like Alaska Air Group (ticker: ALK).
Credit Suisse analyst Jose Caiado on Monday downgraded shares of American Airlines (AAL) to Underperform, the Credit Suisse equivalent of a sell rating, from Neutral and cut his target price $2, to $30 a share, 7% below recent levels.
Caiado is worried about the impact the 737 MAX grounding will have on earnings. American operates 24 Boeing (BA) 737 MAX jets and has another 76 on order.
American "has already removed the MAX from its schedule through Labor Day," Caiado wrote. "But recent news of incremental delays in recertifying the aircraft -- up to about 3 months -- make further capacity cuts a certainty."
Evercore ISI analyst Duane Pfennigwerth feels differently. He sees additional upside in American shares and has put the stock on his tactical outperform list. He already rates shares Outperform and the move means that he sees upside in American stock over coming months. Pfennigwerth is saying buy the stock now. His target for American stock is $35 a share.
"We see upside risk to [American's pricing] ahead of company's [second quarter] investor update this week," Pfennigwerth wrote in a note on Monday. He believes that reduced capacity will lead to higher pricing, just like what happened with Delta Air Lines (DAL) when management said last week that sales growth exceeded expectations.
It looks as if the market can't decide who's right. American stock is flat in Monday morning trading. But investors can take another tack. Caiado increased his price target on Alaska Air to $73 from $70 a share and rates the stock Outperform. Pfennigwerth also likes Alaska Air, rating its shares a Buy with a $75 price target, 16% higher than recent levels.
"We believe that has stabilized and that Hawaii has improved off of the lows," Caiado wrote, addressing expectations for Alaska's second-quarter earnings. Alaska flies mainly out of the West Coast, serving destinations like the Hawaiian islands.
As the disagreement among analysts illustrates, airlines have had a turbulent year. Airline components of the S&P 500 have returned about 12.5% year to date, trailing the 20% return of the S&P 500 over the same span. Investors are worried about a slowing economy, the impact of Boeing's 737 MAX woes, and volatile oil prices. (Jet fuel is often the largest expense for an airline.)
What's more, the sector trades for about eight times estimated 2020 earnings, a 50% discount to the broader market. American and Alaska shares trade for 5.7 and 9.4 times estimated 2020 earnings, respectively.
Delta kicks off airline earnings on Thursday morning and holds an investor conference call at 10 a.m. Eastern time.
Write to Al Root at email@example.com