Goldman Sachs Changes Airline Reservations: Downgrades Spirit, Upgrades United

United Continental Holdings Inc UAL may have friendly skies ahead for investors following a price drop over recent months, but Spirit Airlines Incorporated SAVE is headed for some revenue turbulence, Goldman Sachs said as it flipped ratings on the two carriers.

The Analyst

Goldman Sachs analyst Catherine O’Brien upgraded United from Neutral to Buy, keeping the price target at $108.

O’Brien downgraded Spirit Airlines from Buy to Neutral and lowered the target price from $69 to $60.

The Thesis

O’Brien said in a Thursday note to airline investors that Goldman now sees downside risk to the EPS forecasts for Spirit.

O’Brien lowered Spirit’s 2019 EPS forecast from $5.05 to $4.80, citing a slower-than-expected ramp of revenue initiatives and reduced estimates for future year EPS on the same concern.

“We are of the view that SAVE’s revenue growth is becoming increasingly volatile which we expect to drive increased share price volatility,” the analyst wrote.

Goldman upgraded Spirit to buy back in February, counting on a speed-up in revenue momentum that hasn’t materialized. O’Brien said she’s now less confident the revenue initiatives will materialize enough to offset tougher comparables in the second half of the year.

UAL

There are headwinds for United too, but O’Brien said the forecasts have already incorporated tougher comparables in the second half of 2019 and that risks in the UAL outlook area priced into the stock.

United has dropped in share price since the end of last year, with investors concerned by the airline’s large exposure to China and a troubled $456 million loan UAL made to the majority shareholder of Colombian airline Avianca, on which the shareholder defaulted on terms. The default could result in UAL taking a majority share of Avianca.

Since the loan default was disclosed UAL shares have dropped about 9 percent.

O’Brien said that while combined UAL-Avianca financials would likely reduce United margins, it could boost EPS. “We do not think the potential implications of the breach in United’s loan will necessarily be a long-term overhang on the stock,” O’Brien wrote.

And while UAL does have the highest exposure to China, it’s not actually that high, O’Brien noted, pointing out that China represents 4 percent of UAL’s capacity, not much more than next-largest US player Delta Air Lines, Inc. DAL at 3 percent.

But investors’ reactions to those two things and the resulting price drop now make UAL a good buy, O’Brien said.