If any industry has had the proverbial ups and downs this year is has been the airline sub-sector of the transports, and with good reason. Pricing pressure and over-expansion pinned some of them in, and while jet fuel pricing has been modestly higher, one would expect many locked in hedges at much lower levels. One thing is for sure, if the economy starts to really gain traction, consumer sentiment will improve, and that’s a huge positive for the industry.

In a series of new reports, Merrill Lynch analysts note that bookings are continuing to show improvement, and as noted, the stocks are very sensitive to changes in gross domestic product. In fact, they note that acceleration of growth in the economy could lend even more upside to their estimates.

Here we focus on the stocks rated Buy, one of which is a new member to the firm’s US 1 list of high conviction stock ideas. With the transports making new 52-weeks highs, this is a hot group.

Delta Air Lines

This company consistently ranks high with Wall Street and was added to the Merrill Lynch US 1 list. Delta Air Lines Inc. (NYSE: DAL) and the regional Delta Connection carriers offer service to 334 destinations in 64 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft.

Wall Street analysts have long lauded Delta for the most extensive hedging policy among the airlines, and it owns and operates a refinery in addition to a sizable hedging book. Merrill Lynch notes that while the stock has underperformed this year, if bookings and the economy spike in 2017, the company’s stock multiple stands to benefit the most among the major carriers.

Delta Air investors receive a 1.64% dividend. Merrill Lynch raised its price objective to $66 from $55. The Wall Street consensus price target is $55.94 The stock closed Tuesday at $49.43.

JetBlue Airways

This stock has been on a nice run since the election, but it is still down big from highs printed this time last year. JetBlue Airways Corp. (NASDAQ: JBLU) is a point-to-point airline that operates out of its headquarters in New York, as well as Boston, Fort Lauderdale/Hollywood, Los Angeles (Long Beach), Orlando and San Juan. JetBlue carries more than 32 million customers a year to 87 cities in the United States, Caribbean and Latin America with an average of 850 daily flights.

While the company’s fourth-quarter numbers may take a hit from the travels mayhem caused by Hurricane Matthew, Merrill Lynch stays very positive on the carrier. Along with Amazon, JetBlue recently announced a generous new shop and earn program for TrueBlue loyalty members, further building on an innovative relationship that already delivers to customers unlimited streaming entertainment over JetBlue’s acclaimed free Fly-Fi high-speed in-flight internet.

The Merrill Lynch price target was raised to $30 from $28. The consensus target is much lower at $22.62. Shares closed most recently at $21.19.

Southwest Airlines

This company continues to expand routes and remains a low-cost leader. It is also one of the top picks 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 for the rest of 2016 and 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, have been a key for improving revenues and earnings. With almost no international business at this time, currency headwinds are not an issue for the airline.

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. The company 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. Shares have been hit recently on earnings and some system glitches, giving investors a very solid entry point.

Shareholders receive a 0.85% dividend. The $50 Merrill Lynch price target was raised to $58, and the consensus target is $50.37. The stock closed Tuesday at $47.68.

Spirit Airlines

The company is an ultra-low-cost carrier that sold off big from 2015 highs and still offers investors an excellent entry point. Spirit Airlines Inc. (NASDAQ: SAVE) operates approximately 385 daily flights to 56 destinations in the United States, the Caribbean and Latin America, as well as had a fleet of 79 Airbus single-aisle aircraft comprising 29 A319s, 42 A320s and eight A321s. It offers tickets through its call center and airport ticket counters, as well as online, and through various third parties, including online and traditional travel agents and electronic global distribution systems.

The low-cost carriers tend to have quite an advantage over the legacy airlines. The analysts recently met with top Spirit executives and noted this in a report from last month:

We hosted an investor meeting with Spirits CEO, CFO, and new Chief Commercial Officer at the company’s headquarters. Management believes average fares are its biggest revenue opportunity and maintenance expense is its biggest headwind. We came away with more conviction that the company can continue to drive revenue improvements that outpace the industry.

The Merrill Lynch price target jumps to a whopping $82 from $57. The consensus target is $56.23. Shares closed Tuesday at $57.

United Continental

This company still feels lingering effects of the merger with Continental 5 years ago, but Merrill Lynch likes the improving story and raises the shares to Buy. 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 5,055 flights a day to 373 airports across six continents. Its key U.S. hubs include Chicago, Denver, Houston, Los Angeles, New York/Newark, San Francisco and Washington, D.C. The airline is a founding member of Star Alliance, which provides service to 193 countries via 27 member airlines.

Merrill Lynch has an $84 price target for the stock, and the consensus estimate is $71.97. The stock closed on Tuesday at $70.97.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

The big key for the airlines is economic growth, which finally after eight years of stagnation appears to be coming around. All these stocks offer good entry points as they trade below highs printed over the past few years.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.