The shares of a number of airlines are falling after Deutsche Bank downgraded several names in the sector. Lower corporate profits could lead to reduced air travel, the firm warned.
WHAT’S NEW: Deutsche Bank analyst Michael Linenberg downgraded the firm’s ratings on the following airline stocks to Hold from Buy: American Airlines (AAL), Delta Air Lines (DAL), United Continental (UAL) and Hawaiian Holdings (HA). U.S. corporate profit growth has slowed, and corporate travel trends could follow suit, Linenberg believes. Moreover, airline stocks often underperform towards the end of economic expansion and in the midst of Fed interest rate hikes, the analyst pointed out. Although Linenberg says that airline stocks’ valuations are attractive, he believes that they have low multiples because the market thinks that the sector’s earnings have peaked. Investors are also skeptical about the sector because of their concerns about the U.S. and global economies, the analyst said. However, noting that consumer spending and housing trends have been relatively strong, Linenberg says he’s more upbeat on domestic airlines that are less focused on corporate travel. Among the names in that category the analyst identified are Southwest (LUV), Alaska Air (ALK), JetBlue (JBLU), Spirit Airlines (SAVE) and SkyWest (SKYW).
WHAT’S NOTABLE: On March 29, Stephens analyst Jack Atkins initiated coverage of the U.S. passenger airlines sector with a positive bias, saying that he believes the industry’s structural changes in the past ten years have created an operating environment that can allow legacy airlines to remain profitable throughout an economic cycle. The analyst, who expects multiples to move up as the airlines prove the sustainability and profitability of their models, started Delta and Southwest with Overweight ratings and American Airlines and United Continental with Equal Weight ratings.
PRICE ACTION: In early trading, American Airlines dropped 3.8% to $39.46, Delta fell 3.6% to $46.93, United Continental retreated 4.8% to $57 and Hawaiian Holdings gave back 3% to $45.74.
