If any industry had a very merry 2015, it was the airlines. With the industry expected to print a profit of $18 billion for 2015, the stocks should be, pardon the pun, flying. The bottom line is that many of the top companies have performed at a very lackluster level, and some on Wall Street are asking if 2016 is setting up for the same so-so performance.
In a new research report, Deutsche Bank thinks that investors have been very slow to embrace the jet fuel savings performance, as some feel that other considerations, such as discounting, oversupplied markets and slower global GDP growth, put a damper on the results. That said, the analysts predict that 2016 could as see mixed performance from the top companies.
Deutsche Bank has raised price targets on four of the premier stocks, and all are rated Buy.
American Airlines
This stock started off the year on fire, but it is down sharply since the spring. American Airlines Group Inc. (NASDAQ: AAL) is the holding company for American Airlines. Together with regional partners operating as American Eagle, the company offers an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries. American is a founding member of the Oneworld Alliance, whose members and members-elect serve nearly 1,000 destinations with 14,250 daily flights to 150 countries. This year, American Airlines topped Fortune Magazine’s list of best business turnarounds, and its stock joined the S&P 500 index.
The announcement of the resumption of commercial flights to Cuba could be big for the company. American has operated charter service to Cuba since 1991 with flights from Miami, Tampa and Los Angeles to five Cuban destinations: Camaguey, Cienfuegos, Havana, Holguin and Santa Clara. American has been the leader in the United States to Cuba market for nearly 25 years. This year, American will operate approximately 1,200 charter flights to Cuba, more than any other U.S. carrier and a 9% increase from 2014.
American Airlines investors receive a 0.95% dividend. The Deutsche Bank price target is lifted from $54 to $55. The Thomson/First Call consensus price target is $53.85. The stock closed Monday at $42.40.
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Southwest Airlines
This company continues to expand routes and remains a low-cost leader. It is also the top pick across Wall Street. Southwest Airlines Inc. (NYSE: LUV) continues to increase the footprint and brand awareness all over the country. With the domestic market showing reasonably good strength, and the pricing environment looking very solid through next year, revenues should stay strong and continue to grow. Jet fuel prices, which still remain much lower than in past years, is almost 30% of Southwest’s total costs and have been a key for improving revenues and earnings. With almost no international business at this time, currency headwinds are not an issue for Southwest.
Based on the U.S. Department of Transportation’s most recent data, Southwest Airlines is the nation’s largest carrier in terms of originating domestic passengers boarded. It operates the largest fleet of Boeing aircraft in the world, the majority of which are equipped with satellite-based Wi-Fi providing gate-to-gate connectivity.
Southwest shareholders receive a 0.65% dividend. The Deutsche Bank price target goes from $54 to $57, while the consensus target is lower at $53.54 Shares closed Monday at $43.37.
Spirit Airlines
The company is an ultra-low-cost carrier that sold off big from the springtime highs and is offering investors the best entry point in a year. Spirit Airlines Inc. (NASDAQ: SAVE) was named by Air Transport World as the Value Airline of the Year at the 41st Annual Industry Achievement Awards ceremony this year. The carrier’s super-low prices, which are way below industry standard, allow customers to pay up to choose additional amenities.
Spirit has seen a 40% growth in customer satisfaction, according to internal surveys. This growth has also led to Spirit being included in the Department of Transportation monthly Air Travel Consumer Report beginning this year. While the absolutely no-frills airline is not for everyone, it has a loyal customer following that continues to grow.
Wall Street analysts have noted recently that fares have bottomed in Chicago and Dallas, where the company has over 15% of its capacity. The forward price-to-earnings multiple shrunk 32% this year, and the stock now trades at a low 10.7 times forward earnings estimates, versus a historical 12.7 times, and a high in 2014 of just under 20 times.
The Deutsche Bank price target is raised to $47 from $42, and the consensus target is much higher at $52.38. Shares closed Monday at $41.12.
United Continental
This company still feels lingering effects of the merger with Continental five years ago. United Continental Holdings Inc. (NYSE: UAL) has been a show-me story for many investors, as the merger has not been smooth, and customers have experienced numerous computer glitches that have snarled traffic over the past two years.
United Airlines and United Express operate an average of nearly 5,000 flights a day to 373 airports across six continents. In 2014, they operated nearly 2 million flights carrying 138 million customers. United claims to have one of the world’s most comprehensive route networks, including U.S. mainland hubs in Chicago, Denver, Houston, Los Angeles, New York/Newark, San Francisco and Washington, D.C.
Deutsche Bank raised the price target to $75 from $74, and the consensus target is even higher at a whopping $81.14. The stock closed on Monday at $58.05.
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One thing investors can feel good about when considering adding these stocks is they are not overpaying. The market likely will focus on earnings next year very closely, and companies and sectors that don’t supply good earnings may very well be shunned. The top airlines should do just fine.
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