Credit Suisse’s Top Airline Stocks for 2015

The overall outlook for 2015 from the brokerage firm is a favorable valuation in which cash returns will drive the preference for network carriers. As a result, Credit Suisse is raising its estimates and target prices.

The top pick out of the airline industry is United Continental Holdings Inc. (NYSE: UAL). However, Credit Suisse does favor American Airlines Group Inc. (NASDAQ: AAL) and Delta Air Lines Inc. (NYSE: DAL) over the Neutral-rated Southwest Airlines Co. (NYSE: LUV) and JetBlue Airways Corp. (NASDAQ: JBLU).

According to the brokerage firm, favorable industry dynamics and the windfall from fuel would support a bullish thesis for 2015. Although, the coming year is bringing balance sheet repair, cash flow improvement, rising capital returns to shareholders, as well as margin and return on invested capital expansion, accelerated by fuel declines. At the same time, total unit revenue likely will outperform passenger unit revenue as non-ticket revenue enhancing initiatives continue to mature.

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Credit Suisse’s analyst on the call said in the report:

Expect initial 2015 capacity guides to hold despite lower fuel: While we expect U.S. domestic capacity growth to accelerate in 2015 to ~3.9% from ~2.3% in 2014, gauge and stage account for a significant portion of the growth rather than departures. Load factors are pushing above 85% domestically, and the ability and appetite to add capacity are limited. We expect RPM growth can at least keep pace with ASM growth as GDP accelerates and corporate travel spend remains strong, suggesting pricing should hold if not even modestly improve. International could be a source of upside in 2015 following a soft 2014.

Now, compared to the S&P, the valuation gap has widened since this time last year. The valuations are considered attractive at nine times the price-to-earnings ratio and six times the enterprise-value-to-EBITDA ratio.

The market has been hesitant to fully price in what benefits come from the rapid fuel decline, and the consensus has yet to fully adjust for lower fuel.

24/7 Wall St has included the consensus price targets, the 52-week ranges and recent prices for Credit Suisse’s top three picks. New price target information from Credit Suisse was not immediately available, and that will be updated if received. The top picks were as follows:

• United opened Wednesday at $64.96. The stock has a consensus analyst price target $70.74 and a 52-week trading range of $36.65 to $68.08. Credit Suisse’s price target from October was $71, and had been raised from $68.
• American Airlines began the regular trading session at $53.38. The consensus analyst price target is $60.79, and the 52-week trading range is $26.35 to $54.64. Credit Suisse’s price target as of January 2, 2014, was $58 for AMR.
• Delta opened at $47.48. The consensus price target is $59.31. The 52-week trading range is $28.61 to $50.16. Credit Suisse’s target price was $63, raised from $58, as of December 11, 2014.

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