Morgan Stanley Prefers Delta, United, Alaska Air And Spirit Over Other Airliners

A new report by Morgan Stanley analyst Rajeev Lalwani focuses on the firm’s bullish outlook for the airline industry. Morgan Stanley sees strong fundamentals in the space and believes that patient airline investors will be rewarded as the current cycle plays out.

In addition, Morgan Stanley initiated coverage on several big-name airline stocks.

Value Plays

In the report, Lalwani praised the strong (about 10 percent) free cash flow (FCF) yields, the potential for double-digit earnings growth and the low (about 10x) price to earnings (P/E) ratios in the airline industry as indicators of the value opportunity for investors.

Lalwani believes that these strong industry fundamentals, including capital returns, will continue to limit the potential downside for shareholders as well.

Related Link: Barron's Recap: Airline Stocks Ready To Soar

Patience Required

Lalwani cautions that airline investors should not expect the same type of bullish environment that more than doubled the share prices of many airlines over the past three years to play out over the next three years. Additional capacity and lower prices will likely weigh on airlines throughout the remainder of 2015.

However, Lalwani believes that airline stocks will eventually become fully appreciated and fully valued by the market.

“Surprisingly, valuation is still reflective of the old days (~10x P/E & ~4X EV/EBITDAR) and should be higher by 2-3 turns, even with cyclically high margins,” he wrote.

Initiations

More broadly, Morgan Stanley sees opportunity within all segments of the airline industry.

In the report, the firm initiated legacy airline stocks Delta Air Lines, Inc. DAL and United Continental Holdings Inc UAL at Overweight and American Airlines AAL at Equal Weight.

For low cost/leisure airlines, Morgan Stanley initiated Alaska Air Group, Inc. ALK at Overweight, JetBlue Airways Corporation JBLU at Equal Weight, and Southwest Airlines Co LUV, Hawaiian Holdings, Inc. HA and Virgin America Inc VA at Underweight.

Finally, for the two ultra low-cost carriers, Morgan Stanley set ratings of Overweight for Spirit Airlines Incorporated SAVE and Equal Weight for Allegiant Travel Company ALGT.