Thursday, September 10, 2009

Ual Corp (NASDAQ:UAUA): Upgraded to Overweight at JP Morgan; Positive comments from Barclays

Airlines and particularly Ual Corp (NASDAQ:UAUA) are getting are getting some commentary this morning:

- Barclays is out saying they think many underestimate the potential for a significant airline revenue recovery, particularly for the legacy carriers. With recovery expectations muted, they think even a relatively modest recovery would pave the way for a profitable 2010 and materially higher share prices. They continue to favor legacy airlines over low-fare carriers, with top picks DAL and UAUA, the former getting no respect lately. Among the low-fare airlines, the firm also favors ALGT and JBLU.

Firm believes current thinking on the industry revenue environment and potential for recovery is very small relative to the potential. They understand that companies need to plan for a revenue environment that remains very soft. They also understand that revenue has been headed in a single direction (down) the entire year. While it’s easy to extrapolate these negative trends for a considerable period of time, the firm urges investors to consider two things

1) the market and the companies had little visibility into the speed or magnitude of declines in revenue earlier in the year (Figure 1), and


2) the history has several examples of rapid recovery off depressed bases (Figure 2).

July industry results combined with recent August revenue disclosures point to some evidence that a recovery in airline revenue has begun. They think near-term revenue data is likely to surprise many to the upside. Combined with increasingly easier comparisons, they expect those in the more bearish revenue camp will be forced to begin modeling some revenue recovery

Barclay's current forecast for UAUA calls for 200% raise in share price. Their price target stands at $19 per share.

- JP Morgan is out noting that for the first time in a long time, close-in estimates look about right, while 2010consensus could stand to improve, in their view. More importantly, assuming stable demand and fuel, they now expect winter to pass with nary a bankruptcy in sight, necessitating equity ratings upgrades for LCC and UAUA, downgrades for AAI and JBLU, as well as an overall improvement in both our sentiment and conviction. JP Morgan is upgrading their sector view from Neutral to Overweight.

Are they too late? True, the XAL has led other consumer indices since July, most indices since March, it but has seriously lagged year to date. Ignoring risk and the fragility of certain balance sheets, valuation for ALK is still highly compelling, followed by DAL and UAUA, then AMR and CAL, with LCC bringing up the rear. AAI looks more attractive than JBLU, though not wildly so. LUV is still expensive, in firm's view.

If it sounds like they’re more bullish, it's because they are
Winter is forthcoming. It will be cold. It will be long. But it is not expected to witness the level of upheaval that the firm feared just a few months ago. They simply cannot ignore recent economic data and growing evidence of global economic improvement. As such, they 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. Chief among the near-term, potential catalysts to the upside are seemingly achievable 2H consensus forecasts, a potential shift from negative to positive management guidance, a JPM GDP forecast suggesting 2010 consensus has room to strengthen, and a continued improvement in sentiment as forecasted winter bankruptcy risk wanes.

Close-in estimates look about right; some airlines might actually guide up. For the first time in roughly a year, we don't differ materially from near-term consensus. Better yet, demand may have slightly exceeded initial management forecasts, while weather and fuel appear to have cooperated. Delta is among the more likely to slightly boost existing margin guidance, as well as potentially JetBlue. JP Morgan is not looking for huge improvements, though the passing of seemingly perpetual downward guidance may be greeted
enthusiastically by the market.

New ratings. As a potentially challenging winter approaches, United may occupy the capital-raising spotlight more than others, particularly LCC, in JP Morgan's view. As a result, their UAL Corp (NASDAQ:UAUA) equity rating moves from Underweight to Overweight on the expectation that sentiment improves with each liquidity salvo they fire, whereas LCC moves just a single notch up to Neutral given still-limited liquidity options should fundamentals fail to improve. Countering these changes are downgrades of AAI and JBLU from Overweight to Neutral, despite still attractive risk-reward and healthy potential upside to price targets. These are relative ratings, after all, though the lower perceived risks of AAI and JBLU argue strongly for their continued inclusion in a basket of equities, in their view, or for those lacking the stomach for material risk and volatility.

Lastly, valuations look reasonable (or downright cheap, if one believes in V-shaped demand recovery), particularly EV/EBITDAR for ALK (2010 EBITDAR on 2009 cap structure), followed then by DAL/UAUA, then AMR/CAL, with LCC and the Discounters bringing up the rear. Accordingly, the firm believe now is the time for investors to begin adding aggressively to their existing airline equity baskets.

New price targets are below:

Notablecalls: UAUA is going to fly again. I'm guessing at least 12-15% upside move today with 15-25% upside not out of the question. So, $7.50 -$8.00 is the range we are talking about here. There's a 22% short interest in the name.

Both JPM and Barclays are now outright saying they expect upside surprises in Airline earnings. When was the last time we saw that? I surely can't remember.

These two calls will put fire under the Airlines today. UAUA, AMR, LCC are the ones to keep on the radar.

1 comment:

Jayesh Patel said...

Interesting analysis.

UAUA has revenue per share of $127 as per Yahoo Finance. Every 1% in Net Margin will have EPS of $1.27. Looking at the cost structure, the profit margin is highly volatile so if things turn positive, EPS can break anyone's expectations.