UAL, DAL, AAL: Which Airline Stock is Wall Street’s Best Pick?

The recent Consumer Price Index reading revealed a 2.6% drop in airline fares in April compared to March and 0.9% lower than the prior-year quarter. However, prices might rise again, given that major airlines expect travel demand to remain solid. Keeping an uncertain business backdrop in mind, we used TipRanks’ Stock Comparison Tool to pit United Airlines (NASDAQ:UAL), Delta Air Lines (NYSE:DAL), and American Airlines (NASDAQ:AAL) against each other to pick the most attractive airline stock.

United Airlines (NASDAQ:UAL)

United Airlines reported a lower-than-anticipated loss in Q1, with revenue in line with expectations. Despite a dip in business travel in the quarter, the carrier maintained its full-year guidance. United is optimistic about the remaining quarters of the year, backed by solid travel demand. It highlighted robust demand, especially internationally, where the carrier said it is growing at twice the domestic rate.

United continues to strengthen its balance sheet and has reduced its adjusted total debt by about $4.6 billion over the last 12 months.

Is UAL a Good Stock to Buy?

Last week, JPMorgan analyst Jamie Baker lowered his price target for United Airlines stock to $70 from $81 due to increased risk of recession, but maintained a Buy rating. Baker believes that the long-term relationship between the airline discounters and the Big three (United, Delta, and American Airlines) has inverted, given the revenue momentum and margins of the larger players. Accordingly, the analyst downgraded his ratings for Frontier (ULCC) and Southwest (LUV) to a Hold from Buy.

Baker opined that the idea of cost advantages making low-fare airlines immune to intense competition is wrong. Further, he thinks that the business model in the sector requires an abundance of capital, aircraft, and pilots, with these three catalysts skewed against discounters.

Overall, Wall Street is cautiously optimistic on United Airlines, with a Moderate Buy consensus rating based on nine Buys, five Holds, and one Sell. The average price target of $61.07 suggests an upside of 34.7%. Shares have risen about 20% so far in 2023.

Delta Air Lines (NYSE:DAL)

Delta Air Lines missed Wall Street’s first-quarter expectations. However, investors cheered the company’s Q2 outlook, with the airline projecting revenue growth of 15% to 17%, operating margin of 14% to 16%, and EPS of $2.00 to $2.25, based on “record” advance bookings for the summer.

Delta reaffirmed its full-year 2023 guidance. It expects EPS of $5 to $6 and over $2 billion in free cash flow this year. Also, Delta remains confident about delivering its target of EPS of over $7 and free cash flow of more than $4 billion in 2024.

What is the Target Price for Delta Stock?

Last month, Deutsche Bank analyst Michael Linenberg said that he sees a significant upside in Delta Air Lines stock and pointed out the company’s solid Q2 guidance. The analyst thinks that management has taken the right steps to outperform airline peers.  

“We endorse management’s focus on margins, earnings, and cash generation which, in our view, are the surest path to value creation,” said Linenberg. The analyst believes that such focus is particularly important when the airline industry is in a “fragile state” due to various headwinds, including staffing issues and supply chain problems.

Linenberg also noted that Delta has made considerable progress over the past couple of years due to its various initiatives, including hiring and training staff, investing in its fleet, and upgrading technology. Linenberg maintained a Buy rating on Delta with a price target of $47.

Wall Street’s Strong Buy consensus rating on Delta is based on 10 unanimous Buys. The average price target of $51.80 implies about 53.2% upside. Shares have risen 3% since the start of this year.  

American Airlines (NASDAQ:AAL)

Continued strength in the demand backdrop fueled a 37% rise in American Airlines’ Q1 revenue. The carrier swung to a profit, with adjusted EPS of $0.05 surpassing analysts’ consensus estimate of $0.04. It generated free cash flow of $3 billion and reduced its debt by over $850 million in Q1. Overall, American has reduced its debt by more than $9 billion from the peak levels seen in Q2 2021.

Like its larger peers, American also maintained its full-year outlook and expects adjusted EPS in the range of $2.50 to $3.50.

Is AAL a Buy, Hold, or Sell?

As previously discussed, JPMorgan’s Baker is bullish on the big three airlines. In particular, he upgraded American Airlines stock to a Buy from Hold as part of his airline sector reshuffling to favor carriers with more international exposure and raised his price target to $29 from $26.

Baker praised management’s commitment to reduce debt and noted that the airline has now progressed 60% toward its goal of reducing its debt by $15 billion by the end of 2025. The analyst also finds the stock’s valuation attractive at current levels. He increased his 2024 EPS estimate to $3 from $2.50, citing better revenue expectations.

Nonetheless, Baker continues to see AAL’s margins trailing those of United and Delta. Also, the stock’s risk profile remains higher, as incremental interest burden continues to be a concern “when, not if, the market environment deteriorates.”

Wall Street is sidelined on American Airlines, with a Hold consensus rating based on two Buys, six Holds, and two Sells. The average price target of $18.09 implies 27.4% upside. Shares have advanced nearly 12% year-to-date.

Conclusion

Wall Street is more bullish on Delta Air Lines compared to United and American. Analysts see higher upside in Delta than the other two airlines.

Aside from analysts, hedge funds are also bullish on Delta and have a Very Positive confidence signal, as per TipRanks’ Hedge Fund Trading Activity Tool. Hedge funds increased their DAL holdings by 3.7 million shares last quarter. Further, according to TipRanks’ Smart Score System, DAL earns a score of nine out of 10, which implies it could outperform the broader market over the long term.

Disclosure