JP Morgan Cuts Targets On Most Airline Stocks But Sees Multiple Expansion Ahead

February 3, 2016

31

A new report by JP Morgan analyst Jamie Baker includes some promising projections for the U.S. airline industry. Despite dialing back price targets by an average of about 8.0 percent across the board, Baker explains that airlines are well-positioned moving forward, even in the event of an economic downturn.

In the past, periods of economic weakness have hammered the airline business, but JP Morgan believes that the restructuring that the industry has undergone in the past decade now has most airlines positioned to remain profitable throughout the next U.S. recession.

Baker projects 18.3 percent operating margins for airlines in the firm’s base case economic scenario. However, in the event of a downturn, he projects margins would contract to about 10.5 percent, higher than the industry peak during previous cycles.

“An industry that is capable of earning in a downturn what used to be reserved for the peak unquestionably warrants a re-rating, in our view,” Baker explains.

He adds that if the airline industry weathers the next economic downturn as well as he predicts, many airline stocks will likely begin trading at much higher PE multiples than the 6.0-8.0x range in which they currently trade.

JP Morgan has an Overweight rating on Delta Air Lines, Inc. (NYSE: DAL), American Airlines Group Inc (NASDAQ: AAL), United Continental Holdings Inc (NYSE: UAL), Southwest Airlines Co (NYSE: LUV) and Spirit Airlines Incorporated (NASDAQ: SAVE).

Disclosure: the author holds no position in the stocks mentioned.