The COVID pandemic crisis hit the economy like a sledgehammer – or to be more precise, the government responses of shutdowns and lockdowns hit the economy – but the crisis is fading now. Daily new cases of coronavirus disease have fallen by two-thirds, serious cases have fallen even faster, and the vaccination program is starting to accelerate. There are fits and starts in the process, as in any large and complex program, but trend is clear: we have passed the end of the beginning, and the beginning of the end is in plain sight.
According to 5-star analyst Michael Linenberg of Deutsche Bank, the slow fade of COVID makes now the right time for investors to reevaluate their stance – on airline stocks.
Linenberg says that he is “encouraged by the industry’s nonstop pursuit of numerous initiatives to mitigate the spread of COVID and increase the confidence of the flying public.”
Backing his macro view of the airline industry, Linenberg adds, “[We] have observed numerous instances of pent up demand for air travel, particularly around peak periods and peak travel days underscoring our view that consumers want to travel… Recent economic reports have indicated that the US consumer has accumulated approximately $1.5 trillion of excess savings since the onset of the pandemic, [and] household net worth exceeds $120 trillion (an all-time record)…”
This puts the airlines on a solid foundation. Pent-up demand, by consumers with money to spend, bodes well for the future – and Linenberg has responded to conditions by upgrading his stance on numerous airline stocks.
And now, shifting our views from the general to the specific, we’ve used the TipRanks database to pull up the latest stats on three of Linenberg’s picks.
We’ll start with SkyWest, a regional airline headquartered in Utah and operating through partnerships with several major air carriers, including American, Delta, United, and Alaska Air. SkyWest’s agreements allow it to operate on smaller routes, connecting the major airline hubs with regional destinations. The company boasts the largest fleet of any regional airline in the US, with over 450 jet aircraft in three size categories.
SkyWest’s bounce back from the corona crisis can be seen in the company’s quarterly reports and share appreciation records. Revenues and earnings plummeted in 2Q20, with the top line falling by more than half, to $350 million, and earnings turning negative in Q2. Since then, revenues have showed a steady gain in each quarter. The Q4 top line reached $589.6 million, although EPS remained negative. SKYW shares hit their lowest value in mid-March of last year, and since then have recouped their losses; the stock is up 380% from that trough.
During the ‘corona year,’ SkyWest has managed two important feats. First, the company finished 2020 with $826 million in cash on hand, up 58% from the prior year. And second, the company purchased 21 CRJ700 aircraft (a mid-sized regional airliner, with up to 70 passenger seats) to add to its fleet. And, in January of this year, SkyWest announced an agreement with the US Treasury whereby the company will receive up to $233 million in Payroll Support Program funds.
Looking at SkyWest, Deutsche Bank’s Linenberg upgrades his rating from Hold to Buy, while bumping his price target by 44%, to $65. (To watch Linenberg’s track record, click here)
“We are raising our 12-month price target (PT) on SKYW shares … by applying a ~7.5 EV/EBITDAR multiple to our 2022 EBITDAR estimate and a ~6.5 EV/EBITDAR multiple to our 2023 EBITDAR estimate…”
From the Strong Buy analyst consensus rating, it’s clear that Wall Street sentiment agrees with Linenberg’s stance. The rating is unanimous, based on 4 recent reviews of the stock. Recent share gains have pushed the trading price to $56.05, just under the average price target of $56.50. (See SKYW stock analysis on TipRanks)
Alaska Air (ALK)
Alaska Air has built an enviable reputation for safety among the major airlines. When ranked by size of the fleet, number of destinations, and number of passengers, Alaska Air ranks among the top five US airlines. The company is headquartered in Seattle, Washington, and mainly serves the western US, with destinations across the Pacific Northwest and Alaska, as well as in Hawaii, western Canada, Mexico, and Costa Rica.
Like other airlines, Alaska Air took a beating early in 2020, and while sales are still down, the company has shown sequential quarterly revenue gains in 2H20. In Q4, the top line reached $808 million, up 15% from Q3 but down 63% yoy. On a positive note, despite the deep losses in operating revenue, the company was able to hold its net debt down during the crisis year. Total debt at the end of Q4 was $1.7 billion, flat from the end of 2019.
Alaska Air achieved this even though, at the end of 2020, the company renegotiated a sales agreement with Boeing, for the purchase of 737-9 MAX aircraft. The agreement is for 68 aircraft with options on an additional 52, and marks a major modernization of the company’s fleet – and the replacement of older Airbus airliners. The first of the new jets will enter service with Alaska Air on March 1 of this year.
Joining the bulls, Linenberg upgraded ALK to Buy, while boosting the price target from $56 to $75. The new figure indicates room for 13.5% growth in the year ahead.
Linenberg is confident that ALK will trend positive, justifying his new stance “…by applying a ~6 EV/EBITDAR multiple to our 2022 EBITDAR estimate and a ~5 EV/EBITDAR multiple to our 2023 EBITDAR estimate (which compares to the stock’s historical trading range of 5x – 7x, although multiples can trade above the range during a recession/recovery period).”
Alaska is another airline with a Strong Buy analyst consensus rating, this one based on 7 reviews that include 6 Buys and 1 Hold. However, ALK shares have posted strong gains lately, and that has pushed the price up to $65.89, just above the average price target of $65.29. It will be interesting to see whether the analysts downgrade their ratings or upgrade price targets over the coming months. (See ALK stock analysis on TipRanks)
Southwest Airlines (LUV)
Southwest Airlines started out as a budget carrier but has, in some ways, become the ‘best of the bunch’ among US airlines. In an industry famous for poor service, Southwest built its business model on providing the best possible customer service – and its success has made it the world’s largest budget carrier. In 2019, before the corona pandemic, Southwest saw a net income of $2.3 billion, for its 47th consecutive profitable year.
The corona crisis had its say, of course, and Southwest’s 2020 revenues came in at just $9.04 billion, for a net annual loss of $3.1 billion, or $5.44 per share. On a positive note, Southwest was able to raise $10.9 billion in cash during the year, exclusive of Payroll Support Program funds, and finished 2020 with $14.3 billion in liquid assets. The company’s debt obligations at the end of 2020 totaled $10.3 billion. All told, Southwest has the best liquidity situation among peers in the US airline industry.
Everything that LUV has going for it convinced Linenberg to upgrade his rating to Buy. Along with the call, he bumped up the price target from $50 to $64.
The analyst didn’t provide much commentary, but he did say: “We are raising our 12-month price target (PT) on LUV shares … by applying a ~7 EV/EBITDAR multiple to our 2022 EBITDAR estimate and a ~6 EV/EBITDAR multiple to our 2023 EBITDAR estimate (which compares to the stock’s historical trading range of 6x – 8x)…”
Southwest’s strong liquidity and solid reputation have attracted plenty of positive reviews from Wall Street’s analysts, but the airline industry’s overall condition has also suggested caution. LUV shares have 9 Buys, 2 Holds, and 1 Sell among the recent reviews, making the analyst consensus a Moderate Buy. The stock is selling for $56.11, and the average target of $58.40 implies a modest upside of 4%. (See LUV stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.