Market News Call

Airline Stocks: American Airlines Group Inc (NASDAQ:AAL), Delta Air Lines, Inc.(NYSE:DAL), United Continental Holdings Inc(NYSE:UAL)

Airline stocks–from American Airlines Group Inc(NASDAQ:AAL) and United Continental Holdings Inc(NYSE:UAL) to Southewest Airlines (LUV) and Delta Air Lines, Inc.(NYSE:DAL)–have shown little of the weakness that has dragged down the stock market this year. Can they keep heading higher?

Yes, says Barclays’ David Fintzen, who became the latest analyst to boost his bullish outlook and raise his price targets on the group today–despite American Airlines’ 34% gain this year, United Continental’s 17% rise, Southwest Airlines’ 9.5% advance and Delta Air Lines’ 8.1% increase.

Fintzen explains why:

Given the recent run in the stocks, we thought it a good time to go back to some of our valuation work to again ‘kick the tires’ on the sector. As we thought more about valuation, one of the critical points in determining when airlines reach ‘fair value’ is some thought around earnings power through a cycle. What we’ve done below is flesh out our view of long-term margin potential for each of the large airlines, and then apply 1990s average valuation to get to rough upside potential over the next year. In the relatives, we’ve assumed some convergence of margins, although we’d expect a debate over our assumptions. We’ve also put a premium in higher free cash airlines and discounts where we think long-term earnings power is a bit less clear.

Putting aside the relatives, in aggregate, we get to another 18% upside potential in airlines. That assumes (honestly not by design) that 2014 looks like a mid-cycle year, and applying average 1990s valuation (~6.9x EV/EBITDAR). That would put long-term margin potential at just about the same level as the 1990s and apply a multiple that reflected an industry chronically destroying capital (albeit sustainably) and generating no free cash. In short, we think our multiples and likely our margins could prove conservative.

Fintzen raised his target on Delta to $38 from $34, his target on Southwest Airlines to $26 from $22, American’s target to $38 from $30 and his target on United Continental to $50 from $38.

Delta Air Lines shares are 1.4% higher while Southwest  is up 1.5%. American Airlines is 0.5% higher and United Continental is ahead by 0.4%.



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