Barclays Upgrades United Continental; Which Other Airline Stocks Are Looking Good?

December 9, 2014

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Analysts at Barclays on Wednesday upgraded United Continental Holdings Inc (NYSE: UAL) from a Underweight to Overweight, and elevated their price target from $52 to $76. This triggered a 5.6 percent raise in the stock price, after most airline stocks fell on Tuesday, mainly on the back of higher oil prices.

Airline stocks are recuperating as several analyst firms have portrayed a much more bullish picture for the industry going forward.

"Airlines show 23% average upside potential on an aggressively conservative approach to modeling fuel benefits," Barclays analysts assured. United Continental, in particular, is seen as a strong company because of its “impressive record of earnings per share growth, compelling growth in net income, revenue growth, notable return on equity and good cash flow from operations."

Moreover, Raymond James analyst Savanthi Syth and James Parker assured:

"With the integration effort largely completed, United is refocusing its efforts on operational reliability and efficiency, which should drive both lower costs and improved revenue. We believe United is well positioned to expand margins, with or without the pull back in fuel, as it executes on several cost and revenue initiatives. Furthermore, as its financial performance improves, we expect the level of cash returned to shareholders to increase meaningfully, including the likely introduction of a dividend."

Credit Suisse seems even more bullish; on December 1, it reiterated its Outperform rating for United Continental and set a price target of $79.

The Industry

According to a Deutsche Bank report, December should be a strong month for airlines, and capacity growth should be one of the main drivers here. However, the bank does not expect United Continental to increase its capacity but, on the opposite, to reduce it by 3.4 percent year-over-year in December.

Still, analysts predict that other airlines will increase their capacity. For instance, Delta Air Lines, Inc. (NYSE: DAL) is expected to deliver a 4.1 percent growth, American Airlines Group Inc (NASDAQ: AAL) 2.2 percent, and Air Canada, 6.3 percent.

For Delta, Barclays has issued an Overweight recommendation and a $51 price target (stock currently trades below $47 per share), while American Airlines also received an upgrade on Wednesday, from Equal-weight to Overweight, setting a $63 price target, which implies a 26 percent upside potential from the current price point.