The firm views the airline sector as a "direct way to play macro trends and themes" as "low energy prices drive bottom-line growth." Analyst Jamie Baker lists American as his top pick in the sector.
Must Read: At American Air, the Arbitration Nobody Wanted Has Ended
Baker also said he expects Alaska (ALK) to underperform the industry, given mounting competition from Delta (DAL) in its Seattle hub.
Baker listed five reasons for picking American. He expects the operating margin to rise to 18.3% in 2015 from 12% in 2014. He views the management team as "highly capable and tested in merger integration." He thinks consensus earnings estimates are too low: analysts surveyed by Thomson Reuters estimate profit of $8.09 a share, compared with a consensus estimate of $5.71 in the current year.
In addition, because American does not hedge fuel it benefits more from falling fuel prices than carriers that do hedge.
Finally, Baker said he "could envision a scenario in which American is included in the S&P 500 Index if positive earnings are recorded" in the current quarter. "Such an event would attract a more stable, longer-term investor base," he said.
Shortly after the opening bell on Thursday, American shares were up $1.09 to $50.03. Shares are up 99% year to date.
As a "pair trade," Baker suggested investors buy United (UAL) and short Alaska. He said United's 2014 first-quarter results were diminished by challenging weather conditions. "We recommend investors take advantage of potential confusion around the easier comps in Q1:15," he wrote.
As for Alaska, he said that "revenue per available seat mile headwinds are joining higher cost per available seat mile ex-fuel to make the 2015 outlook rather uncertain.
"We expect other airline capacity in Alaska markets to increase 15% in Q1:15, and an even more challenging 30% increase in Delta overlap markets during that period," Baker wrote. "Consequently, our 2015 Alaska consolidated PRASM of -2.8 significantly underperforms the industry."
Must Read: Despite Delta, Some Have High Hopes for Alaska in Seattle
For the entire industry, RASM (revenue per available seat mile) should decline 1.6% in 2015, Baker noted. "We'd consider any further RASM growth as a 'bonus' in light of the industry's lower fuel bill and more efficient cost structure," he wrote.
Meanwhile, in a report released Thursday morning, Imperial Capital analyst Bob McAdoo listed American as one of four top picks in the sector, along with GOL (GOL) , Spirit (SAVE) and Allegiant (ALGT) . McAdoo raised target prices throughout the sector due to falling fuel prices; he rates 9 of 11 airlines at outperform. Only Hawaiian (HA) and United have a lower "in-line" rating.
McAdoo raised his target price for American to $72 from $58. He raised his target price for Alaska, which has an outperform rating, to $69 from $60. Shortly after the opening bell on Thursday, Alaska shares were up 95 cents to $56.14. Shares are up 53% so far in 2014.