The airline industry has certainly seen better days. The response to the global coronavirus pandemic has put hard restrictions on travel, especially international travel, while also putting unprecedented numbers of people out of work. It was a one-two body blow to the airlines; most people weren’t allowed to travel, and when that began to loosen, too few people had money to afford travel.
The airline stocks have reacted in entirely predictable ways. They plummeted in March and February, during the general stock collapse, and have failed to regain traction since. There was an abortive rally in early June, when it appeared that travel restrictions would loosen – but that sputtered out when the virus began to spread again, prompting fears of a ‘second wave’ as well as governmental moves back toward lockdown policies.
Through all of this, Savanthi Syth, 4-star analyst with Raymond James, has kept her finger on the airlines’ collective pulse. Syth has been following the industry for Raymond James for the past decade; she knows the players and the field. And in recent days, she has pointed out three airlines that deserve a second look from investors.
Opening up the TipRanks stock database, we’ve pulled up Syth’s three new ratings. She rates two as Buys, and the third a Hold – but that third stock may be the real story, as her Hold represents an upgrade from Sell. Let’s take a look at Syth’s airline ratings, and find out why she is unexpectedly bullish on air travel.
We start with Southwest, the world’s largest bargain-price airline and a long-time blue-chip stalwart of the S&P 500 index. Southwest has based its market strategy on a combination of low cost and positive customer service, an approach reflected in its very stock ticker, LUV. The company’s effort has been successful, in the only way that counts. LUV finished 2019 with $2.3 billion in net income, it’s 47th profitable year in a row.
That profitability simply evaporated in 1H20, when the travel restrictions took hold. Southwest reported a loss of 15 cents per share in Q1, which deepened to an ugly $2.67 in Q2. In the earnings report, management noted the brief partial recovery in May and June, and the reversal in July.
On a positive note, Southwest reported good liquidity, with $14.5 billion in cash and cash equivalents on hand as of the end of Q2, along with $12 billion in unencumbered assets. Strong liquidity kept the company in good with the credit rating agencies, and Southwest has the only investment-grade credit rating among major US airlines. Management boasted that they have been able to shrink the average daily cash burn from April’s $30 million per day to $16 million per day in June.
Syth notes all of this in her note last week on LUV. She writes, “Having entered this crisis the best in class in terms of balance sheet and profitability, we expect Southwest to exit in similar manner. Southwest's relative advantage is further supported by its predominantly U.S. exposure and somewhat low-cost structure given our view that domestic demand is likely to recover faster than international travel…”
In line with her outlook, Syth rates the stock a Buy, and her $42 price target implies a robust one-year upside of 33%. (To watch Syth’s track record, click here.)
Wall Street appears to agree with industry expert Syth on this one. LUV shares hold a Moderate Buy rating from the analyst consensus, based on 10 Buys against 4 Holds set in recent weeks. Shares are selling for $32.33, and the average price target, at $42.08, is nearly identical to Syth’s. (See Southwest’s stock-price forecast on TipRanks)
Next up is Alaska Air, another airline, like Southwest, with a solid reputation for quality, safety, and customer service. In fact, these two airlines consistently rate in the top 5 among US domestic airlines. Alaska Air brought in $8.8 billion in revenue for 2019, while holding its position as the dominant West Coast regional airline.
A good reputation did not prevent Alaska Air from feeling the same hurt as the rest of the airline industry. Like Southwest, ALK saw earnings turn rapidly from net profit in Q4 to a net loss in Q1, and to a deepening negative in Q2. The Q1 and Q2 EPS loss numbers were 82 cents and $3.54, respectively. Quarterly revenue in Q2 was down sequentially, from $1.64 billion to a mere $421 million. At this point, even if air travel should see all restrictions lifted today, the Street still expects ALK to report a loss in Q3.
After all of that, ALK has seriously underperformed compared to the broader markets. The stock is down 46% from February, and down 30% from the brief peak in June. Prior to the crisis, ALK had paid out a reliable dividend, with a hefty 5.8% yield, but that has been suspended until further notice. The company’s upper management has taken steep pay cuts, and Alaska Air has increased its debt by $825 million. While these measures may help shore up operations in the short term, they are not long-term solutions to the situation.
Syth, however, is willing to give Alaska Air the benefit of the doubt. She writes of the company, “Alaska remains laser focused on controllable factors including strategically shoring up liquidity and embarking on structural cost reductions. Given its low-cost and capital-efficient DNA, flexibility from undecided fleet plans/commitments and upcoming lease expirations, as well as predominantly domestic focus, we believe the risk reward remains compelling on this historically well managed airline…”
Her upbeat outlook comes with a Buy rating, and her $43 price target indicates an upside potential of 25% for the next 12 months. (To watch Syth’s track record, click here)
The Moderate Buy analyst consensus rating on ALK is based on 11 reviews, breaking down to 7 Buys and 4 Holds. The stock’s $45.72 average price target suggests a premium of nearly 31% from the current selling price of $35. (See ALK stock-price forecast on TipRanks)
Last on our list is the first-place holder for size among world airlines. American is number one when measured by several key metrics, including aircraft fleet size, scheduled passengers carried, and revenue per passenger mile. Or at least, it was before the crisis. The coronavirus pandemic has wiped out those positives for AAL.
The Q1 and Q2 losses here were deep, and are trending worse. In Q1, the company saw EPS turn to a negative $2.65, much worse than the $2.16 forecast. The Q2 number was far worse sequentially, falling to $7.82 in net loss per share. This was 21% worse than expected before the earnings release. These were the first quarterly losses for the company in seven years.
It was a bitter pill for a company that entered 2020 with a bullish outlook. American had finished 2019 with record revenue, reporting $45.8 billion for the full year. A full half of net losses, combined with a gloomy industry outlook for the rest of the year, has investors pulling back from AAL.
There is a ray of hope, however, in the Q2 earnings report. American Airlines reported a 9.5% beat on revenue expectations, bringing in $1.62 billion for the quarter. Even that was tempered, however, as the year-ago number was $11.96 billion. And the revenues are dwarfed by corporate debt; American borrowed $1.2 billion in July, and planes to borrow an additional $4.75 billion under the CARES Act.
Looking at the big picture for American, Syth writes, “[We] see a more balanced near-term risk-reward, albeit with the least appealing risk-reward dynamics vs. U.S. airlines under coverage due to the materially higher debt burden… Our view remains that bankruptcy is not in the cards for American in 2020 with Chapter 11 only a potential avenue if the earnings recovery stalls over multiple years… American's balance sheet likely leaves it crippled for years to come.”
Believing that American may be able to forge a path out of the current morass, Syth upgraded her stance on the stock from Sell to Hold. While she’s not recommending that investors buy in now, she’s not telling existing shareholders to divest, either. Syth declined to name a price target for AAL shares.
The analyst consensus on AAL is in line with Syth’s upgrade. The shares have 12 recent ratings, breaking down to 3 Buys, 3 Holds, and 3 Sells, making the analyst consensus here a Hold. American’s stock sells for $11.39, and the average price target of $13.63 suggests it has a 19% upside potential for the year ahead. (See AAL stock-price forecast on TipRanks)
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