Analyst Watch: Airline Stocks Ready to Soar?
U.S. stock index futures pointed to a higher open on Wall Street Monday, signaling a slight recovery from Friday's end-of-the-week selloff, despite a downgrade for Irish debt and concerns over Hungarian funding.
Friday's losses were the biggest since June 29, although the major averages are still about 3.3 percent higher for July.
Here's what guests on today's Squawk on the Street are watching before the opening bell:
Robert McAdoo, airline analyst with Avondale Partners, has a market outperform rating on Delta with a price target of $15. Delta reported second-quarter profits before the bell Monday.
In fact, all 10 airline stocks he covers currently are rated market outperform, with expected price gains of at least 5-10 percent greater than the market over the next six to 18 months.
McAdoo says that, based on recent comments and new 2Q 2010 guidance from several carriers, it is clear that business is back, and the resurgence is being is being led by corporate and international demand – segments of the business that weighed most heavily on year-ago results.
"We are revising our estimates for several carriers following the release of various 2Q'10 investor updates/guidance in recent weeks," McAdoo says.
Specifically, McAdoo sees:
- Positive revenue outlook on resurgence in corporate and international demand,
- Several major U.S. carriers have recently commented on the strength they are observing in corporate and international demand — two segments of the business that produced the largest headwinds to results a year ago. Delta Air Lines, for instance, saw May '10 corporate booked revenue improve by 63% y/y on stronger yields and a 35% jump in ticket volumes. We thus remain bullish on the revenue outlook for coming quarters.
Airline industry generally remains disciplined on capacity and non-fuel unit costs
- The airline industry has undergone significant structural change over the last nearly 2 years, necessitated first by record high oil prices in 2008 and then economic recession in 2009. Year-to-date, total system industry capacity as defined by the Air Transport Association has dropped roughly 8 percent from 2008 levels.
Mainline domestic capacity has declined nearly 11 percent during this same period. Despite these significant capacity cuts, industry non-fuel unit costs have experienced only modest increases as airlines have sought to remove capacity-related costs from the system. It appears that the commitment to these structural changes remains intact despite improving operating conditions — leaving the airline industry highly leveraged to the modest, but steady, economic improvement that we are currently seeing. As such, we anticipate significant profits from the U.S. airline industry over the next several quarters.
See more of what these and other analysts and money managers have to say, and get the latest financial news. Watch Squawk on the Street every weekday morning starting at 9 a.m. ET.
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