15079138 - rome / italy _ geerman deutsche bank in rome 1 sept. 2012
If you are looking for investing inspiration, Deutsche Bank analysts have some valuable tips. The banking giant has recently released a few reports advising investors to pull the trigger and load up shares of US airline Mesa Air Group (MESA) and tech giant Microsoft (MSFT). Let’s delve deeper into these reports to see why MESA and MSFT are poised to outperform:
Mesa Air Group Still Strong Buy After Weak Earnings
It’s no secret that the commercial aviation company struggled during its June quarter. While shares have declined 25% year-to-date, 5-star Deutsche Bank analyst Michael Linenberg tells investors to block out the bearish noise surrounding Mesa’s lackluster Q3 earnings release.
On August 8, MESA reported adjusted EPS reached $0.30, coming in below Linenberg’s $0.45 estimate. Operating expenses also exceeded the analyst’s original $149 million prediction, totaling $163 million. Management attributed this to higher than expected flight operations costs.
MESA faced operational issues that included a ground damage incident and longer c-check turn times on its CRJ-900s. This resulted in three of its planes being sidelined for the entirety of the third quarter. More bad news followed after an industry-wide failure left MESA unable to meet the performance criteria under its capacity purchase agreement (CPA) with American Airlines (AAL), causing two planes to be removed from the agreement.
Linenberg points out that prior to the operational disturbances, MESA had a 99.6% controllable completion factor, exceeding the requirements of its American agreement. He also notes that the company should be able to extend its contract to continue operating its Embraer E175 planes for United Continental (UAL), which is set to expire sometime between August 31 and December 31.
“We continue to favor MESA for its low-cost structure, ample supply of pilots and attractive growth prospects. We believe the company’s earnings trajectory is being underappreciated by the market, as MESA remains the most attractively priced airline stock in our coverage universe, trading at approximately 3.2x our 2019 EPS estimate,” Linenberg noted.
As a results, the analyst reiterates a Buy rating on Mesa stock, with $17 price target, which implies about 195% upside from current levels.
As always, we like to give credit where credit is due. According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Linenberg has yielded a yearly average return of 19.7% with a 61% success rate. Notably, Linenberg is ranked #152 out of 5,232 analysts.
All in all, the rest of the Street mirrors the analyst’ sentiment. MESA has a ‘Strong Buy’ analyst consensus and a $12 average price target, indicating 94% upside potential. (See MESA’s price targets and analyst ratings on TipRanks)
Microsoft Stock Has More Room to Shine
Microsoft has recently became the target of criticism after it placed restrictions on the transfer of Microsoft SQL Server and Windows Server licenses to third party clouds. Both Amazon (AMZN) and Google (GOOGL) were quick to call out MSFT for forcing customers into using a single vendor.
Starting October 1, Microsoft’s customers will need to acquire “license mobility” or pay an additional fee to deploy the licenses on rival cloud infrastructures. Deutsche Bank’s Karl Keirstead writes that it’s unclear exactly what the “license mobility” cost will be, but that it will likely be enough to keep customers using its Azure cloud infrastructure. He argues that the restrictions are part of MSFT’s efforts to simplify licensing as well as increase demand and revenue for Azure.
“The impact seems small as long as these higher fees only apply to single-tenant services. We believe it is highly unlikely that MSFT makes bolder moves to raise the cost of deploying MSFT licenses on AWS or Google multi-tenant services, as this would be highly disruptive to MSFT customers and jeopardize a material MSFT-on-AWS revenue stream,” added Keirstead.
MSFT could even get a boost from these restrictions. The analyst points out that some customers may want to add new MSFT licenses before October 1 to avoid the new fees.
Overall, Keirstead’s bullish thesis remains unchanged. He reiterates a Buy rating on MSFT stock, with $155 price target, implying 16% upside potential. (To watch Keirstead’s track record, click here)
All in all, this ‘Strong Buy’ stock is no Wall Street secret. After all, in just three months, MSFT has attracted 20 ‘buys from best-performing analysts. With a return potential of 15%, the stock’s consensus price target stands at $153.52. (See MSFT’s price targets and analyst ratings on TipRanks)