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Cowen Says Buy These Top Airline Stocks Before Earnings

Trey Thoelcke

In the constant debate over whether the economy in improving, one item that should perk up the interest of the pundits is the pickup in the airline industry. In a new research report, the analysts at Jefferies point out that in spite of rising jet fuel costs, which are a third of total airline expenses, corporate travel was up in March, and that could bode well for the top companies and the economy. Despite having quarterly estimates that are at the higher end of Wall Street estimates, they are encouraging investors to buy some of the top names before earnings are released, as they see some of the companies beating expectations.

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Here are some of the stocks rated Outperform at Cowen, and three that are expected to beat expectations.

American Airlines Group Inc. (AAL) has gone from the doghouse to the penthouse on Wall Street. The stock has been on fire since emerging from bankruptcy and merging with U.S. Airways. Together with wholly owned and third-party regional carriers operating as American Eagle and US Airways Express, the airlines operate an average of nearly 6,700 flights per day to 339 destinations in 54 countries from its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington. The Cowen price target for the carrier is $47. The Thomson/First Call estimate is set at $43.20. American closed Wednesday at $35.51.

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Alaska Airlines Group Inc. (ALK) is rated Outperform and is one of the names the Cowen team thinks will beat estimates for the quarter, and it is a high-conviction call at the firm. The analysts are moving the numbers up to reflect higher guidance from the company. Cowen lifts its earnings-per-share estimates for the first quarter to $1.26 from the prior $1.08. The consensus Wall Street number is lower at $1.12. Investors are paid a 1.1% dividend. The Cowen price target is $100, and the consensus target is even higher at $101.59. Alaska Air closed Wednesday at $93.32.

Delta Air Lines Inc. (DAL) has a history of beating earning estimates, and the Cowen analysts think this quarter it could happen again. In fact, the firm has seen solid earnings estimate revision activity from around Wall Street over the past month, suggesting that other analysts are also becoming a bit more bullish on the firm’s prospects in both the short and long term. Investors are paid a 0.7% dividend. The Cowen price target is $41, while the consensus is right in line at $41.06. Delta closed Wednesday at $33.62.

Southwest Airlines Co. (LUV) has gone from industry underdog to an industry leader, and it is another of the firm's high-conviction calls in the group. With the domestic market showing good strength, and the pricing environment looking very solid for the second quarter and the busy summer travel season, Cowen is at the high end of estimates again on this top stock to buy. Investors do receive a small 0.7% dividend. Cowen's price target for Southwest is set at $26, and the consensus target is $24.77. The stock closed Wednesday at $23.54.

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United Continental Holdings Inc. (UAL) is one of the few airlines expected to report a first-quarter loss. The company is also probably the only airline to have revenues decline in the first quarter, as the winter storms had an impact on regional operations. While the Cowen team keeps its Outperform rating on the stock, the analysts also think Wall Street is tiring of the company's passenger revenue per available seat mile deficiency and would like to see better second-quarter guidance. The Cowen price target is $56, and the consensus is lower at $52.65. Shares closed Wednesday at $43.94.

The rise in jet fuel could ultimately be passed along to consumers in the form of higher ticket prices. With that in mind, the improving economy and the advent of summer is the perfect storm for the airline industry, especially in the red-hot domestic market. Strong leisure travel combined with consistent corporate business travel adds up to a winning combination for investors.

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