According to one Wall Street analyst, the airline’s shares are so cheap in terms of valuation that they should rise quickly — they just need the right series of catalysts in the making.
“While macroeconomic and geopolitical risks may continue to dampen the potential for a historic 4Q rally, we believe sharply depressed valuations represent a dry fit…but is everyone (globally) in tune? Longer-term pockets of recovery remain – corporate travel (head is easing global travel restrictions, Evercore ISI analyst Duane Pfennigwerth said in a new note to clients.
“With continuous grid recovery and low probability fuel [costs] next year, the case for traffic growth in ’23 (vs. ’22) is obvious. Over time, power normalization should lead to unit cost (and unit revenue) normalization,” he said.
The airline industry is already seeing signs of brighter skies after the turbulent COVID-19 era.
United Airlines recently raised its third-quarter revenue guidance to 12% from 11%. Operating margins appear to be around 10.5%, up 10% from the previous estimate.
Rival American Airlines said in September that demand was strong — now seeing sales rise 13% in the third quarter, up from 10% to 12% previously.
Airlines have never been invited to a lockdown rager, but once the punch bowl is removed, they get an equal amount of hangoversDuane Pfennigwerth, Evercore
The above plan guidance comes despite the ongoing general economic slowdown.
Delta reports earnings on Thursday morning and could make better comments to fuel a renewed bullfight in the airline sector.
But to be sure, there are still haters of airline stocks. The NYSE Arca Airlines Index is down about 44% year to date, compared with a 20% decline for the S&P 500.
Delta’s aforementioned stock trades at more than 4.8 times earnings, compared to 15.8 times the S&P 500’s.
Pfennigwerth added: “As far as we can tell, there is no discernible credit or difference in demand pockets remaining in the recovery. Markets are taking an all-round view of cyclical stocks amid a potential recession, regardless of the industry in which stocks are fully engaged in the stimulus-juicy lock-in party . Instead, travel spent ’20-’21 depressed, almost shut down. The airlines never got an invitation to the lockout rager, but after they took the punch bowl, get an equal dose of hangover.”
Brian Sozzi is a senior editor and Host at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and continues LinkedIn.
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