AirTran Shares Jump 6% on Upgrade

Merrill Lynch upgrades the company to buy from neutral.
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AirTran

(AAI)

shares jumped 6.6% on Thursday after Merrill Lynch upgraded the company to buy from neutral, telling investors that growth over the next five years will be better than expected.

Analyst Michael Linenberg told investors that the carrier's five-year earnings per share growth rate would be 17%, up from previous expectations of 16%, causing him to boost his 2004 EPS estimate to $1 from 85 cents. That's at the high end of current Wall Street expectations, topping the 97 cents expected on average, according to Thomson/First Call.

Because of Linenberg's upgrade, AirTran was up 90 cents, to $14.55. The Amex Airlines index was up 1%.

"AirTran's low-cost, low-fare model continues to prove successful, as the carrier has remained consistently profitable through both the economic and sector downturn," said Linenberg, in his note. "During the past several years, AirTran has become very attractive to the business passenger, a function of a growing network and reasonable fare structure."

Indeed, AirTran's biggest rival in its Atlanta hub,

Delta Air Lines

(DAL) - Get Report

, has noted its popularity with business travelers and has begun testing all business class flights between Atlanta and a pair of cities, Houston and Kansas City. With AirTran planning to double in size between 2003 and 2008, Linenberg said a combination of attractive growth opportunities and a comparatively low valuation make AirTran an attractive stock to own.

"The carrier has ordered 110 Boeing 737 and 717 aircraft, which will begin delivering in 2004," he said, noting AirTran plans on growing capacity between 15% and 25% through 2008. "It is these growth opportunities that underlie our revised earnings outlook for 2004."

Even after raising his 2004 EPS estimates, Linenberg said that AirTran looks attractive to peers in the low-cost space. On a fully taxed basis, AirTran shares are trading at about 21 times his 2004 estimates.

"While the multiple may seem lofty, we would point out that other low-cost, low-fare models are fetching even higher multiples," he said. "On a 2004 basis,

JetBlue

(JBLU) - Get Report

trades at 32.7 times

estimates,

Southwest

(LUV) - Get Report

trades at 24.8 and

WestJet

(YWJA)

trades at 27.8."