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The Rationale Behind Cowen's Airline Bearishness

In a note released on Wednesday,
Cowen lowered its ratings on a host of airline stocks, including Air Canada AC 0.89% ACDVF 0.49%, Alaska Air Group, Inc. ALK 1.34%, American Airlines Group Inc AAL 0.86%, JetBlue Airways Corporation JBLU 1.16%, Spirit Airlines Incorporated SAVE 1.77% and United Continental Holdings Inc UAL 0.43%.

Significant Multiple Expansion

Analyst Helane Becker noted that airline stocks and multiples have improved significantly, as demand and business improved post the U.S. presidential election. The share gains, according to the analyst, are the result of multiple expansion and not earnings improvement.

Margin Compression A Worry

Although expecting unit revenues to improve by 0.7 percent in 2017 compared to a 4.5 percent drop in 2016, Cowen feels margins are likely to be down due to higher costs on jet fuel and labor. The firm expects capacity of airline stocks in its universe to improve by 2.5 percent on top of the 3.5 percent growth in 2016, with the domestic market driving growth. Given the margin pressure, the firm forecasts a 20 percent decline in adjusted net income in 2017, with the first quarter seeing the steepest drop.

Cowen's Top Picks For 2017

Cowen highlighted the following as its top picks for the upcoming year:
Delta Air Lines, Inc. DAL 2.47%, SkyWest, Inc. SKYW 2.46%, Southwest Airlines Co LUV 2.64% and Volaris Aviation, given their underperformance in 2016 due to company-specific issues.

Ratings, Price Targets

  • Air Canada: Downgraded to Market Perform from Outperform; $15 price target.
  • Alaska Airlines: Downgraded to Market Perform from Outperform; price target raised to $95 from $92.
  • American Airlines: Downgraded to Market Perform from Outperform; $50 price target.
  • Delta Airlines: Maintained at Outperform; $57 price target.
  • JetBlue: Downgraded to Market Perform from Outperform; $23 price target.
  • Southwest Airlines: Maintained at Outperform; price target raised to $55 from $44.
  • Spirit Airlines: Downgraded to Market Perform from Outperform; price target raised to $58 from $53.
  • United Continental: Downgraded to Market Perform from Outperform; price target lowered to $75 from $77.
  • WestJet Airlines: Upgraded to Market Perform from Underperform; price target raised to $22 from $19.
DateFirmActionFromTo
Jan 2017Cowen & Co.DowngradesOutperformMarket Perform
Dec 2016BarclaysInitiates Coverage OnEqual-Weight
Nov 2016CitigroupInitiates Coverage OnBuy

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