Airline stocks are so cheap from a valuation perspective that they ought to take off at a rapid pace — they just need the right series of catalysts, which may be taking shape, according to one Wall Street analyst.
“While macroeconomic and geopolitical risks may continue to suppress historical 4Q rally potential, we believe sharply depressed valuations represent dry kindling … but does anyone (in the world) have a match? Longer-term pockets of recovery remain — corporate travel (happening, yet eternally debated) and easing global travel restrictions,” Evercore ISI analyst Duane Pfennigwerth stated in a new note to clients.
“With continued network restoration and lower assumed fuel [costs] next year, the case for traffic growth in ’23 (vs. ’22) is obvious. Over time, capacity normalization should drive unit cost (and unit revenue) normalization,” he added.
The airline industry is already seeing signs of brighter skies after the turbulent COVID-19 period.
United Airlines recently lifted its third quarter revenue guidance to 12% growth from 11%. Operating margins are seen at about 10.5%, above a prior estimate for 10%.
Rival American Airlines said demand was strong in September — it now sees third quarter sales rising 13% compared to prior guidance for 10% to 12%.
Airlines never got an invitation to the lockdown rager, yet they get an equal dose of hangover now that the punch bowl has been taken awayDuane Pfennigwerth, Evercore
The above-plan guidance comes despite the ongoing overall economic slowdown.
Delta reports earnings Thursday morning and may provide more upbeat commentary to fuel a renewed bull case on the airline sector.
But, to be sure, there continues to be haters on airline stocks. The NYSE Arca Airline Index has plunged roughly 44% year to date compared to a 20% decline for the S&P 500.
The aforementioned Delta’s stock is trading on a paltry forward price-to-earnings multiple of 4.8 times compared to the S&P 500’s 15.8 times.
Added Pfennigwerth, “As far as we can tell, there is no visible credit or differentiation to the view that pockets of demand remain in recovery. Markets are taking a one-size-fits-all view of cyclical equities into a potential recessionary backdrop, regardless of each sector’s experience through the pandemic. The way airline stocks have been acting, you’d think the industry fully participated in the stimulus juiced lockdown party. Instead, travel spent the roaring ’20-’21 in a depression, nearly shut down. Airlines never got an invitation to the lockdown rager, yet they get an equal dose of hangover now that the punch bowl has been taken away.”
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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