Analyst Mike Linenberg predicted 2015 industry profits of $16.5 billion, up from this year's record of $12.4 billion, based on lower fuel prices, lower interest expense and modest non-fuel cost increases.
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In a report issued Monday, Linenberg raised EPS estimates and 12-month price targets for eight airlines. "Among the large market cap names we favor UAL," he wrote, raising his target price for United to $80 from $50.
United shares closed Friday at $64.10, up 69% year to date.
Linenberg said his favorite small-cap name is JetBlue (JBLU) . He raised his target price to $21 from $17. The only reason Linenberg did not raise his price target for Delta (DAL) is because he raised it last week to $60 from $48.
JetBlue closed Friday at $14.81, up 73% year-to-date. Delta closed Friday at $47.68, up 74% year-to-date.
Linenberg's rationale is that major airline stocks are currently trading at 10.7 times his projected 2015 EPS and their enterprise values are trading at 5.5 times projected 2015 EBITDAR. "Given that airline shares have historically traded 10x - 12x on a forward P/E basis and 5x - 7x EBITDAR, we view the current trading levels as an attractive entry point," he wrote.
He warned, howeve,r that fuel prices may not go down forever. "A key risk for the industry is fuel price volatility; every $1 per barrel move in jet fuel prices impacts industry pretax profits by $400 million," he said.
The strong outlook for airlines is not a new story.
So far this year, U.S. airline stocks are the best performing sector among the 98 Dow Jones U.S. total market industry groups. "The group (DJUSAR) is up 76% compared to the 8% gain in the S&P 500 and the 19% jump in the Dow Jones Transportation Index (TRAN)," Linenberg said.
"This follows on the heels of 2013's superb showing when the group rose 91% vs. the 30% gain in the S&P 500 and the 39% rise in the TRAN," he said. "We believe better-than-expected profitability, the launch of capital deployment programs, and increased investor awareness have been key contributors to share price outperformance.
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