JPMorgan Updates The Airline Sector: 3 Downgrades, 1 Upgrade

The airline sector as a whole is poised for its best margin expansion in four years, in part from lower capacity, strong demand a disciplined approach toward fuel costs and no near-term risks to labor costs, according to JPMorgan.

The Analyst

JPMorgan's Jamie Baker downgraded:

United Continental Holdings Inc UAL from Overweight to Neutral with a price target lowered from $98 to $95.

Spirit Airlines Incorporated SAVE from Overweight to Neutral with a price target lifted from $51 to $59.

Southwest Airlines Co LUV from Neutral to Underweight with a price target lowered from $63 to $52.

The analyst simultaneously upgraded JetBlue Airways CorporationJBLU from Neutral to Overweight with a new $20 price target.

United: Margins In Focus

The bullish case for United was partly based on its January turnaround plan, Baker said in the downgrade note. (See the analyst's track record here.)

The airline targeted growing its domestic market share in the mid-continent hubs, but its progress to date is "mixed," Baker said.

The stock has become "controversial": while management deserves credit for working to boost margins, parity with Delta Air Lines, Inc. DAL is unlikely to be seen in the near-term, according to JPMorgan. 

Related Link: Macquarie Cites Valuation Concerns In United Continental Downgrade

Spirit: Valuation Concerns

Spirit Airlines shares have gained 16 percent year-to-date and are now trading at 12 times forward NTM P/E, Baker said. While this valuation isn't "particularly stretched," there are other airline stocks that offer a superior risk-reward profile moving forward, as upward estimate revisions and multiple expansion in Spirit's stock have already taken place, the analyst said. 

Southwest: Cost Concerns

Despite boasting one of the best profit profiles and highest quality balance sheets within the airline sector, the bullish case for Southwest Airlines can no longer be justified, Baker said in the downgrade note. The airline's 2019 guidance of 3 percent (ex-fuel) cost per available seat mile growth is "unusually high," especially when factoring in expectations for 5-percent capacity growth, the analyst said. 

JetBlue: Credible Plan

JetBlue is targeting an EPS of $2.50 to $3 by 2020, which implies an increase of more than 90 percent from the midpoint of expected 2018 EPS, Baker said. The company has a "credible probability of success" in hitting its targets from multiple initiatives, including the following, the analyst said:

• A review of maintenance programs/fleet.
• Management redundancies.
• Expense management.
• Sales/distribution programs.

Price Action

At the time of publication Tuesday, the airline stocks were trading as follows: 

• United Continental: up 1.14 percent at $85.96.
• Spirit Airlines: up 0.73 percent at $52.47.
• Southwest Airlines: near-flat at $47.95.
• JetBlue Airways: up 5.04 percent at $16.98.

Related Link:Deutsche Bank's Airline Update: Delta, American Upgraded To Buy