Time to Hit Buy on These 2 Airlines Stocks, Says Deutsche Bank

A rising economic situation, a moderation in the rate of inflation, and the prospect of lower interest rates later this year – all of these have a positive effect on the bedrock support of the US economy, the average consumer. They have felt a pinch recently from high inflation and high interest rates, but wages and job creation remain strong – and the positive mid-term outlook bodes well for consumer discretionary spending.

Airline carriers are likely to see gains in such a scenario. The airline industry has faced some idiosyncratic headwinds lately, in the form of airliners being grounded (think Boeing’s 737 MAX series, or Airbus’s A320/A321neo planes), but is rethinking its capacity for 2024 – and finding that a moderate outlook may still support profitable operations.

A note from Deutsche Bank analyst Michael Linenberg, focused on the airline industry’s US domestic outlook, lays out the case clearly. Linenberg says, “We believe more moderate domestic ASM (available seat mile) growth for 2024 will have positive implications for domestic unit revenue performance, and by extension, should translate into solid top-line performance for the domestic-focused names.”

Getting to specifics, Linenberg is willing to tell investors that its ‘time to hit buy,’ and he points out two airline stocks that investors should keep in mind for solid upside potentials. Let’s take a closer look.

Southwest Airlines (LUV)

We’ll start with Southwest Airlines, the leading low-cost carrier in the US domestic air travel market. Along with its reputation for low ticket prices, Southwest has maintained a wide network of routes, across the US and into several nearby international regions. The company operates a fleet of 817 aircraft, and these are exclusively Boeing 737 models – but not the MAX versions that have recently been grounded.

From an investor’s standpoint, Southwest has always been a return-oriented company. The airline has a long-standing policy of sending capital back to shareholders, through both regular dividends and share buybacks. The aggregate capital return since 2010 has totaled over $13.3 billion. The company suspended dividend payments during the COVID pandemic, but restarted the payments last year – and in 2023, paid out a total of $428 million in dividends. The current common share dividend payment, of 18 cents, annualizes to 72 cents per share and gives a modest forward yield of 2.08%.

Southwest finished its last quarter – 4Q23 – with a set of solid results. The company’s top line came to $6.8 billion, a company quarterly record – and a figure that was up more than 10% year-over-year and beat the forecast by $80 million. The company’s bottom line non-GAAP EPS was reported at 37 cents per share, 24 cents better than had been anticipated.

In another metric, showing the company’s strength going forward, Southwest reported total liquidity at the end of Q4 of $12.5 billion – balanced against a total debt of $8 billion, giving the company a stable base to work from.

Turning to the Deutsche Bank view, we find analyst Linenberg basing his upbeat view of Southwest on several factors, including the company’s large market share in the low-fare category, and its lack of exposure to the recent safety-related aircraft groundings.

Linenberg says of the stock, “Our confidence stems from the fact that Southwest is the largest low-fare carrier domestically, and in a very good position to benefit from both its own network restructuring as well as that of its competitors. Furthermore, Southwest has not been impacted by any of the issues that have led to grounded aircraft among its competitors (e.g., MAX 9 and GTF powered A320.321neos). Lastly, Southwest has run a very good operation of late following numerous investments and initiatives to improve reliability. We note that our target multiple is still very much below the low end of the stock’s mid-cycle historical trading range of 6x – 8x forward EV/EBITDAR as investors question whether LUV deserves to trade at a premium multiple (our target multiple is low enough that we can refrain from that debate for the time being).”

Summing up, the DB analyst upgrades LUV shares from Hold to Buy, and raises the price target from $28 to $42, implying a 22% gain in the next 12 months. (To watch Linenberg’s track record, click here)

Overall, it’s clear that Wall Street is not yet ready to jump on this airline. The stock has a Hold consensus rating, based on 11 recent reviews, including 1 Buy, 9 Holds, and 1 Sell. The stock is trading for $34.54 and its $30.09 average price target suggests a one-year downside of 13%. (See Southwest’s stock forecast)

JetBlue Airways Corporation (JBLU)

Next up, JetBlue, is another well-known name in the low-fare air carrier niche. The company, which began operating in February of 2000, now boasts over 1,000 daily flights to more than 100 destinations and employs over 22,000 people. JetBlue is consistently counted among the top ten largest US domestic carriers, by total passenger numbers, and has hubs at Boston, Fort Lauderdale, LA, NYC, Orlando, and San Juan.

Where Southwest, above, flies Boeing aircraft, JetBlue works mainly with Airbus. The company operates a varied fleet of aircraft, including A321 and A321neo models, A320 and A220 planes, and Embraer E190 aircraft. As noted above, Airbus has been dealing with engine issues that have grounded many of the A320 and A321 aircraft; JetBlue has been impacted by those groundings, with at least 6 aircraft already out of operation.

In another item that has impacted JetBlue, the company in 2022 entered a $3.8 billion agreement to acquire Spirit Airlines – but that agreement has been blocked in US courts since late last year, on anti-trust grounds. The case is still moving through the court system.

In other news, this month, JetBlue entered into an agreement with Icahn Enterprises, which is one of the airline’s major shareholders, under which two of Icahn’s top-level officers will join JetBlue’s Board of Directors.

Turning to the financials, the company brought in $2.3 billion in revenue for 4Q23, a total that was down 3.7% year-over-year – although it beat the forecast by $40 million. The company’s Q4 earnings came to a net loss, of 19 cents per share by non-GAAP measures. However, this loss was 8 cents narrower than had been expected.

Deutsche Bank’s Linenberg sees reason for optimism here, particularly in the company’s valuation and the accession of the new Board members. He writes of JetBlue, “We view the change in senior management and the involvement of an activist (who recently secured two Board seats) as a positive development for the stock. Furthermore, JetBlue’s $2.3 billion of equity value pales in comparison with its unencumbered asset base which we estimate is approximately $11 billion. We note that our target multiple is still very much below the low end of the stock’s mid-cycle historical trading range of ~6x – 8x forward EV/EBITDAR as JetBlue still faces uncertainty with its appeal of the court’s ruling blocking its merger with Spirit and the fact that approximately 11 aircraft, on average, will be grounded during 2024 due to GTF engine issues.”

Quantifying his stance on JetBlue, Linenberg gives the shares an upgrade from Hold to Buy, and raises his price target from $4 to $9, which points toward a 34% share appreciation for the coming year.

Again, this is a stock that Wall Street is showing caution on. The shares have 6 recent analyst reviews, breaking down to 2 Buys, 3 Holds, and 1 Sell, for a Hold consensus rating. The stock’s $6.08 average target price and $6.71 current trading price together imply a 9% downside for the next 12 months. (See JetBlue’s stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.