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JPMorgan upgrades American Airlines, calls stock sell-off 'overdone'

  • JPMorgan upgrades American Airlines to overweight, saying revenue initiatives bode well for the largest U.S. airline.
  • "We were previously somewhat skeptical on the pace and execution of these initiatives, guidance for the fourth quarter suggests that American is benefiting from prudent revenue management," wrote JPMorgan analyst Jamie Baker.
  • Shares of American Airlines have fallen roughly 11 percent since the company reported earnings Thursday; they remain up 11 percent in the last six months.
An American Airlines plane takes off at the Miami International Airport.
Getty Images
An American Airlines plane takes off at the Miami International Airport.

The recent sell-off in shares of American Airlines is "overdone," according to one Wall Street analyst.

JPMorgan upgraded American to overweight, arguing that plans to boost revenue will continue to buoy the company. The carrier narrowly beat profit expectations in last week's earnings report after multiple hurricanes in August and September forced it to cancel some 8,000 flights.

The shares fell as much as 11 percent since the company reported earnings Thursday, but they remain up more than 10 percent in the last six months; the S&P 500 has posted an 8 percent gain over the same time.

The largest U.S. airline is expanding its no-frills basic economy class and making other changes in the domestic premium cabin that "will drive higher returns and stronger unit revenue," wrote analyst Jamie Baker on Wednesday. "While we were previously somewhat skeptical on the pace and execution of these initiatives, guidance for the fourth quarter suggests that American is benefiting from prudent revenue management."

American said it expects fourth-quarter revenue per available seat mile, a key industry metric, to increase roughly 2.5 to 4.5 percent year over year, reflecting "continued improvement in demand for business and leisure travel," according to an American Airlines press release.

"Following what we view as an overdone correction in American Airlines shares after third-quarter earnings season, we view the risk-to-reward in American Airlines as attractive," added Baker. His new price target of $65 is nearly 40 percent higher than the stock's closing price on Tuesday.

The analyst also downgraded shares of JetBlue to neutral and Spirit to underweight in the same note.

Commenting on JetBlue, Baker noted that "investor focus on cost discipline and margins has us more cautious on JetBlue shares than previously." He added that any combination of an unfavorable pilot contract outcome, a decision to enter the trans-Atlantic market, or a reduction in aggregate demand could weigh on the shares.