Bank of America adds a new airline to its 'buy' list as investors flock to the thrashed sector
- Airline stocks are enjoying a "full force" rebound in investor interest, Bank of America said Monday, but only certain firms are best positioned to weather weakened travel demand through the year.
- Analyst Emma Young upgraded Alaska Air to "buy," saying the firm will increase its net debt in 2020 by only 8% compared to an average 40% increase among passenger airlines.
- "Balance sheets and capital structures still matter, and we continue to favor airlines with more conservative balance sheets," she said.
- Alaska stock surged as much as 11.8% to intraday highs, outperforming peer firms.
- Watch Alaska Air trade live here.
The "recovery trade is in full force" for airline stocks and certain firms are emerging as investors' best bets, Bank of America said Monday.
Analyst Emma Young upgraded Alaska Air shares to "buy" and lifted its price target to $53 from $36, implying a 24% gain from Friday's close. Alaska and Southwest Airlines are well-positioned for the industry's revival from travel lockdowns due to their strong balance sheets and efficient capital structures, she wrote.
The firm also upgraded JetBlue to "neutral" on hopes of recovering leisure-travel demand.
Bank of America sees airlines recovering from their early-2020 slump to a 55% revenue decline from 90%. Rebounding leisure travel will certainly aid the sector, but its "true catalyst" for returning to past health will be the return of corporate demand, Young wrote. Until then, expect a heavier weighting of leisure interest to stifle revenues and lead firms with strong cash flow to outperform, she added.
"While the recovery is taking bankruptcy risk off the table, balance sheets and capital structures still matter, and we continue to favor airlines with more conservative balance sheets," the analyst said.
Alaska Air soared as much as 11.8% on the news but sits 30% lower year-to-date. The company broadly outperformed other airlines in Monday's session.
The bank expects Southwest and Alaska to have the smallest growth in net debt by the end of 2020. Alaska will add only 8% to its total debt over the year compared to a 40% average increase among peers, Young projected.
The industry's recovery could accelerate if a coronavirus vaccine becomes widely available, she added. The sector is anticipating a multi-year recovery before hitting 2019 demand, but a faster-than-expected treatment rollout would boost consumer comfort in traveling.
Alaska joins Southwest and Allegiant as the only airlines with "buy" ratings from Bank of America. JetBlue, Delta, and United Continental hold "neutral" ratings, and the firm rates American, Spirit, and Hawaiian Airlines "underperform."
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