JPMorgan says this airline stock can more than double as demand for international travel grows

Published Mon, May 8 20236:09 AM EDTUpdated Mon, May 8 202310:55 AM EDT

Investors should buy American Airlines as the carrier's valuation is too good to pass up, according to JPMorgan. Analyst Jamie Baker upgraded the airline's shares to overweight from neutral. Baker said this reflects a long-term shift in which "the Big 3" airlines — American, Delta and United — have seized the high ground from the "discounters." "American is now 60% of its way to reducing its total debt by $15bn by the end of 2025. While we don't yet define American's balance sheet as 'fixed,' the pace of improvement is commendable and ahead of our expectations, yet the stock currently resides 35% below when debt peaked in 2Q21 — a period when demand recovery was but a Pollyannaish thesis and American was steeped in losses," Baker wrote in a Monday note. AAL 1D mountain American Airlines stock "Simply put, we no longer view AAL equity as 'trapped' by its debt burden (to the same degree as before to be clear, especially if the balance sheet repair process continues), and find its current valuation … too attractive to ignore, particularly during a time of significant international demand growth, not to mention American's 82% Neutral/Sell consensus rating," he added. Baker also raised his price target to $29, which implies the company's shares surging 109% from where they closed Friday. Shares of American gained 2.4% during premarket trading Monday. The stock has rallied 9% year to date. To be sure, the analyst said American is not entirely in the clear. "Indeed, looking at the current 5yr CDS-implied probability of default, it hasn't improved all that much. Now to be fair, the [credit default swap] market is very technical, but the current market implies a 47% probability of default assuming 20% recovery," Baker said. "Seems high in light of current industry trends and the aforementioned balance sheet improvement. And this figure hasn't rallied much y/y. We were basically at this level of implied default probability a year ago BEFORE the variant conga line was ending and about to unleash a torrent of domestic demand," he added. Nonetheless, JPMorgan stated that the Big 3 airlines have outperformed its index of discounter carriers due to their international exposure. Baker said last year's domestic travel boom is now easing, with year-over-year revenue trending downward toward low-single digits. Baker downgraded Southwest Airlines to neutral, as he expects more internationally exposed carriers to outperform in the near term. — CNBC's Michael Bloom contributed to this report.