Airlines Have More Room To Run

Airline stocks have surged since mid-August on higher bookings, signs of improved capacity discipline in 2017, Berkshire Hathaway Inc BRK BRK's surprise investments in the sector and a post-election rally in cyclical stocks, Imperial Capital’s Michael Derchin said in a report. He commented that airline shares still appeared “relatively attractive using 2018 estimates.”

Berkshire Hathaway recently purchased stakes in the four largest U.S. airlines: Southwest Airlines Co LUV, American Airlines Group Inc AAL, United Continental Holdings Inc UAL and Delta Air Lines, Inc. DAL.

Positive On The Group

Despite the recent run up in U.S. airline stocks, with the XAL Airline Index gaining more than 20 percent year-to-date and reaching a 52-week high on November 21, “we still have a positive view on the group, and would use any pullbacks in prices to add to or initiate new positions in the shares of our favorite ideas – domestically focused, lower cost carriers,” Derchin mentioned.

He named Hawaiian Holdings, Inc. HA, Spirit Airlines Incorporated SAVE, JetBlue Airways Corporation JBLU, Allegiant Travel Company ALGT and Southwest Airlines as top picks in the sector.

Price Targets Raised

The analyst raised the one-year price targets based on 2018 estimates.

• Allegiant: Outperform, price target raised from $160 to $196.
• American Airlines: In Line, price target raised from $43 to $49.
• Delta Air Lines: In Line, price target raised from $44 to $52.
• Hawaiian Holdings: Outperform, price target raised from $62 to $66.
• JetBlue Airways: Outperform, price target raised from $23 to $26.
• Southwest Airlines: Outperform, price target raised from $46 to $57.
• Spirit Airlines: Outperform, price target raised from $58 to $68.

Derchin downgraded the rating on United Continental from Outperform to In Line, while raising the price target from $65 to $76. He maintained In-Line ratings for Alaska Air Group, Inc. ALK and Virgin America Inc VA, while reiterating their price targets at $84 and $57, respectively.