Deutsche Bank Downgrades A Slew Of Airliners

Deutsche Bank has downgraded American Airlines Group Inc (NASDAQ: AAL), Delta Air Lines, Inc. (NYSE: DAL), United Continental Holdings Inc (NYSE: UAL) and Hawaiian Holdings, Inc. (NASDAQ: HA) to Hold from Buy saying "several of our key macro indicators are suggesting a more challenging environment for 2016."

The brokerage also cut the price targets of American Airlines to $46 from $55, Delta to $55 from $68, JetBlue Airways Corporation (NASDAQ: JBLU) to $32 from $32 and United to $62 from $75.

"More specifically, we have observed a slowdown in US corporate profits which is a concern given that they are a leading indicator of economic activity, and therefore, could lead to reduced demand for corporate travel," analyst Michael Linenberg wrote in a note to clients.

However, he said consumer spending and housing have fared better, and should bolster demand for discretionary and leisure travel, at least through the summer.

Related Link: UBS Cautious Into Airliners' Q1

A Few Favorites: Domestics Not Heavily Reliant On Corporate Travel

As such, the analyst favors domestic names that are less reliant on corporate travel, such as Southwest Airlines Co (NYSE: LUV), Alaska Air Group, Inc. (NYSE: ALK), JetBlue, Spirit Airlines Incorporated (NASDAQ: SAVE) and SkyWest, Inc. (NASDAQ: SKYW).

The analyst added, "Underlying our revised 2016 quarterly PRASM forecast of -6.0 percent, -4.5 percent, -2.5 percent, -1.0 percent (vs. prior forecast of -6.0 percent, -4.5 percent, -1.5 percent, -0.8 percent), respectively, for the US airline industry is decelerating capacity growth."

"While moderating supply growth should mitigate macro headwinds, we do see elevated downside risk to top-line growth in 2H 2016 based on the latest US economic data."

Linenberg noted that although stocks are attractively valued, they tend to underperform late cycle.

"The prevailing view is that we are in the latter stages of an economic cycle (April marks the 83rd month of US GDP expansion, 4th longest on record) which is typically a period of underperformance for US airline stocks. Also, airline stocks tend to underperform the market during a Fed tightening cycle (although admittedly this doesn't seem to be a "typical" tightening cycle)."

"So although airline stocks are attractively valued (major airlines trading at 9.0x 2016 EPS vs. historical range of 10x – 12x and growth airlines trading at 11.9x vs. 15x – 20x), the compressed multiples may be the market's way of telling us that the sector's earnings have peaked."

Related Link: Airline ETF Endures Oil's Rise, Hedging Issues

According to the analyst, investor interest in the major airline stocks is "lukewarm."

"We have learned from our client meetings over the past several months that attractive share price valuations and pro-shareholder initiatives are not reason enough to invest in the sector, particularly the major airline names, as concerns about the US and global economy dominate the conversation."

Long-Term View: Positive

Despite his revised outlook, the analyst's positive long-term investment thesis on the sector remains intact.

"We continue to believe that the long-term investment thesis is still intact, i.e. the US airline industry has become an investable sector with significant free cash flow and run by management who are pro-shareholder," Linenberg highlighted.

He continued, "Furthermore, the US airline industry is on track in 2016 to exceed last year's record operating profits. However, we think the primary risk is that this year could be a repeat of last year when investors balked at investing in major airline stocks due to economic uncertainty."

According to TipRanks, Linenberg has a success rate of 69 percent, with average return per recommendation of +21.8 percent. He is ranked 28 out of 3,840 analysts.

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