Bob McAdoo of Imperial Capital provided an update on the airline industry on May 28, highlighting stocks such as American Airlines Group Inc (NASDAQ:AAL) and Southwest Airlines Co (NYSE:LUV).
McAdoo disagrees with investors and analysts who are concerned that “management teams have lost discipline [regarding capacity growth] in light of lower jet fuel prices” and that airline shares are consequently dropping. McAdoo maintains that “most current capacity levels were planned well before the decline in jet fuel prices.” As for the recent sell-off in airline shares, the analyst notes that the move was “meaningfully misguided.” McAdoo explains that most airlines are likely to report 2Q15 earnings “that are 40-50% higher than their previous historic best quarters… The recent 5-10% selloff in the middle of such a quarter likely creates a great opportunity for investors seeking potentially significant value driven opportunities.”
Though McAdoo provides ratings for several airlines, he focuses his analysis on American Airlines and Southwest. American Airlines CEO Doug Parker spoke with Bloomberg in an interview last week in which he indicated that AAL will “compete aggressively” with discount airlines. McAdoo commented, “Investors seemingly took these comments as an indication that American was starting a new more aggressive campaign that would disrupt the markets,” though he does not believe that this announcement is much different than comments made by AAL in the past. He explains, “[American Airlines] has historically matched prices and will likely continue to do so in competitive markets.” Given the size and scale of AAL, lowering certain fares will not have an impact in the company’s bottom line.
Bob McAdoo currently has an Outperform rating on American Airlines with an $82 price target. He has rated the stock 9 times since April 2014 with a +2.7% average return per rating.
As for Southwest, McAdoo explained that the company “is adjusting service in its new markets and that should further alleviate pricing pressure as excess capacity is moved to new markets.” The analyst believes this move will have a “positive impact on pricing.” When looking at the airline’s metrics for departing seats and schedules, McAdoo points out that Southwest’s “presently scheduled year-end 2015 departing seats are up only 3.5% versus full year 2014.” He continued, “When viewing Southwest’s growth in the context of GDP growth, one should probably make another adjustment to these numbers as we believe the 3.5% figure probably overstates the competitive impact of Southwest’s growth.”
McAdoo also notes that Southwest is removing 14 trips per week between Dallas and Washington DC, as well and removed two routes altogether from Washington DC to Ohio. However, Southwest plans to add capacity to three routes in the fall, all leaving from Washington DC. McAdoo concludes, “As Southwest continues to tweak its [Washington DC] schedule to meet demand, we expect pricing trend trends to continue to improve.”
Bob McAdoo currently has an Outperform rating on Southwest Airlines with a $64 price target. He has rated the stock 5 times since January 2014 with a +40.5% average return per LUV rating. On average, the top analyst consensus for Southwest is Strong Buy.
Bob McAdoo has a 63% overall success rate recommending stocks with a +23.5% average return per rating.