Time to Buy Airline Stocks, JP Morgan Says

Posted by: Justin Bachman on September 10

A prominent Wall Street analyst says it’s time to buy into airlines. And not just their public debt, but the actual equity. The rationale — in a report Thursday by Jamie Baker at JP Morgan — is that cash levels are such that no Chapter 11 filings are likely this winter, and with a gradual economic recovery in 2010 airlines will reap the rewards of their recent defensiveness. In short, decent bumps in traffic are likely to yield robust financial gains. Of course, Baker litters his extensive report with no shortage of caveats, as befits an industry whose fortunes tend to turn on a dime. Airline stocks typically trade in tandem with the price of crude oil and are subject to wild swings based on a slew of risk factors. The industry flies daily at the mercy of fuel price spikes, Mother Nature, and terrorism, among other unknowns. (You may not want to try these equities at home.)

Here’s some of Baker’s introduction: “If it sounds like we’re more bullish, it is because we are. Winter is forthcoming. It will be cold. It will be long. But it is not expected to witness the level of upheaval that we feared just a few months ago. We simply cannot ignore recent economic data and growing evidence of global economic improvement. As such, we believe the industry is on the verge of turning a financial corner and would suggest that risk-tolerant investors begin adding more aggressively to their existing airline equity holdings.”

In 2010, JP Morgan now expects only one airline, United (UAUA), to lose money for the full year, with some of the per-share profit predictions quite bullish.

But here’s the table that really caught my eye. Check out these price targets for 15 months down the road and then consider just how battered these stocks have been in recent years. In March, US Airways (LCC) traded under $2, American (AMR) was at $2.40, Delta (DAL) was $3.51, Continental (CAL) hit $6.37. United flirted with $3 in July.