Airline stocks are so cheap from a valuation perspective that they should take off at a rapid pace – they just need the right set of catalysts, which could be taking shape, according to a Wall Street analyst.
“While macro and geopolitical risks may continue to suppress the potential for a historic Q4 rally, we believe that heavily depressed valuations represent dry kindling…but has anyone (in the world) a match? Pockets of longer-term recovery remain – business travel (which is happening, yet eternally debated) and easing global travel restrictions,” Evercore ISI analyst Duane Pfennigwerth said in a post. new note to customers.
“With the continued restoration of the network and the supposed drop in fuel [costs] next year, the case for traffic growth in 23 (from 22) is clear. Over time, the normalization of capabilities should lead to the normalization of unit costs (and unit revenues),” he added.
The airline industry is already seeing signs of brighter skies after the turbulent times of COVID-19.
United Airlines recently raised its third-quarter revenue forecast to 12% growth from 11%. Operating margins are estimated at around 10.5%, above a previous estimate of 10%.
Rival American Airlines said demand was strong in September – it now sees third-quarter sales rise 13% from previous forecasts of 10% to 12%.
Airlines never got an invitation to lockdown, but they’re getting an equal dose of hangovers now that the punch bowl has been removedDuane Pfennigwerth, Evercore
The better-than-plan forecast comes despite the ongoing global economic slowdown.
Delta reports earnings Thursday morning and could provide more upbeat commentary to fuel further bullish business in the airline industry.
But, to be sure, there continues to be some haters on airline stocks. The NYSE Arca Airline Index has fallen about 44% since the start of the year, compared to a 20% drop for the S&P 500.
The aforementioned Delta stock trades at a paltry forward price-earnings multiple of 4.8 times compared to the S&P 500’s 15.8 times.
Pfennigwerth added: “As far as we can tell, there is no visible credit or differentiation to the idea that pockets of demand remain in recovery. of potential recession, regardless of each sector’s experience during the pandemic.The way airline stocks have behaved, one would think that the industry has fully participated in the stimulus lockdown party.Instead of that, travel spent 20-21 years in a depression, almost closed Airlines never received an invitation to containment, but they have an equal dose of hangovers now that the punch bowl has been took of.