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Stocks  | October 4, 2019

One analyst says buy airline shares. Another one says sell. Wall Street appears confused. Yet differing views among firms aren’t all that uncommon. Reconciling them is simply a matter of your time horizon.

On Thursday, Buckingham Research analyst Daniel McKenzie downgraded shares of Delta Air Lines (ticker: DAL) from the equivalent of Buy to Hold and slashed his price target from $74 to $58, just 10% higher than recent levels. Delta shares were down 2.4%, at $53.04, in recent trading.

“With or without a recession, shares are likely to re-rate lower for longer on [fourth quarter] cost pressures annualizing into 2020,” McKenzie wrote in a Thursday research report. He worries that a slowing economy will hurt Delta earnings.

His fears were likely stoked Wednesday, when Delta stock tumbled 4.7% after the company updated its quarterly guidance. Delta said it expects earnings per share between $2.20 and $2.30, narrowing its previous $2.10 to $2.40 range; the consensus estimate was $2.26.

The trim wasn’t all that bad, but recession fears pounded the market, driving the Dow Jones Industrial Average down 1.9%. Economically sensitive air carriers fell even more, with airline stocks in the S&P 500 dropping 4.1% Wednesday.

J.P. Morgan analyst Jamie Baker published a research report Thursday updating his 2021 earnings estimates for the sector. He recommends buying Delta and has a $78 price target, 48% higher than recent levels.

Delta stock is trading at just 6.4 times Baker’s 2021 earnings-per-share estimate, and his target price implies the valuation multiple reaches 9.5 times earnings. “We apply a higher multiple for Delta relative to United—8.5 times—and American—6.6 times—given Delta’s leading financial output in its legacy airline peer set,” he explains.

Baker also has Buy ratings on Alaska Air Group (ALK), American Airlines Group (AAL), United Airlines Holdings (UAL), and Spirit Airlines (SAVE). He rates JetBlue Airways (JBLU) a Hold and recommends selling Southwest Airlines (LUV). On balance, he appears bullish on the sector, arguing that owning a few better-managed carriers cuts some of its historic risks.

“Our revised [Delta] target price is based on shares trading at 8.5 times...our 2019 earnings per share,” writes McKenzie. “The trim to our multiple reflects our view of a downward bias to earnings—until we get more macro clarity.” This year is almost done, but economic angst is high, so he is focused on the now and moving to the sidelines.

McKenzie and Baker have differing 2020 earnings estimates for Delta, with the former at $6.80 a share and the latter at $7.46. The biggest difference between the target prices? Baker is looking to next year’s earnings and beyond. McKenzie is worried about now.

Barron’s recently wrote positively about American Airlines, arguing that the stock had fallen far enough. American trades for about 4.7 times estimated 2020 earnings. Shares have fallen 6.9% this week, worse than the 2.7% drop of the Dow.

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