American Air Gets a Buy Rating as Oil Prices Pressure Airlines
NEW YORK ( TheStreet) -- S&P Capital IQ initiated coverage of American Airlines (AAL) - Get Report with a buy rating, at a time when airline stocks once again seem to be trading on oil price fluctuations.
Watch the video below to get Jim Cramer's take on what the Middle East conflict means for the oil sector:
"Based on our positive industry view and a favorable view on valuation, we find the shares attractive," S&P Capital IQ analyst Jim Corridore wrote in a note issued Wednesday. "We do feel AAL deserves to trade at a modest discount to the group based on a slower revenue growth rate and higher debt levels, but we see the current valuation gap versus peers as too high."
In mid-morning trading, American shares traded at $50.95, down $1.06.
Shares are down about 5% this year, despite getting a boost after the March 16 announcement that the carrier would join the S&P 500.
Corridore has a 12-month target of $70. He estimated current year earnings at $10.34 a share. Analysts surveyed by Thomson Reuters estimate $10.37. In an interview, Corridore said his firm "is filling a coverage gap after American came out of bankruptcy" in December 2013.
On Thursday, geopolitical pressure in Yemen helped to push crude prices higher. West Texas Intermediate surged 2.4% to $50.40 a barrel on news Saudi Arabia and Gulf allies bombed Yemeni militias as the country faces civil war. The infighting could potentially disrupt crude supplies in the region, alleviating pressure on global oversupply.
All three global U.S. airlines are down for the year, due to concerns about the strong dollar as well as oil prices, based on mid-morning prices. United (UAL) - Get Report is down 4% and Delta (DAL) - Get Report is down 11%. Domestic carriers are generally higher, led by JetBlue (JBLU) - Get Report which is up about 17%.
As oil prices ran down, American benefited from its policy of avoiding fuel hedges. If oil prices rise, an unhedged position would be less advantageous.
Among airlines, "American remains most leveraged to changes in fuel cost given its strategy to not hedge -- a strategy we do not expect to change," Stifel analyst Joseph DeNardi wrote in a March 10 note. "As a result, until fuel prices stabilize, we would expect American (and the industry in general) to remain strongly, negatively correlated with oil prices.
"We continue to see this as a headwind for the industry as investors remain hesitant to get into airlines prior to an increase in oil prices, something most investors (based on our discussions) expect will happen at some point," DeNardi wrote. He has a buy recommendation.
"We're concluding AAL's and the industry's ability to price in 2Q15 is likely better vs. street expectations given the decent demand backdrop," McKenzie wrote. "Pricing to Europe looks particularly resilient, aided in part by ECB stimulus actions that according to media reports are driving a sustained recovery."
McKenzie said Delta and United are his top picks, while American's "addition to the S&P 500 likely boosts shares in the near-term." He has a $74 price target for American and a buy rating for all airlines, except for Allegiant (ALGT) - Get Report and Alaska (ALK) - Get Report, which get neutral ratings.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
