Analyst: Buy airline stocks this summer

United, Delta and Alaska could buck the usual trend of a seasonal slump.

By TheStreet Staff May 18, 2011 12:34PM

Image: Airline (© Christie & Cole/Corbis)By Ted Reed, TheStreet

 

After a better-than-expected first quarter for the airline industry, a veteran analyst is recommending that investors buy airline shares now, despite their historical tendency to perform their best between fall and spring.

 

Deutsche Bank analyst Mike Linenberg, in a report issued Wednesday, said the outlook is good for "a contra-seasonal trade" after carriers largely managed to overcome a variety of first-quarter headwinds.

 

"History would suggest that the time to own airline shares is from the fall to the spring and to lighten up during the early summer," Linenberg wrote. "However, every once in a while airline shares are some of the summer's best performing stocks."

 

Summer was most recently a good season for airline shares in 2003 and 2008, Linenberg said. This time, the carriers he prefers are Delta (DAL), United (UAL) and Alaska (ALK).

For Delta, which closed Tuesday at $11.01, his price target is $16. For United, which closed Tuesday at $26.37, his price target is $31. For Alaska, which closed Tuesday at $68.44, his price target is $70.

 

Linenberg's investment thesis is that the industry typically suffers most of its losses in the first quarter, when travel is seasonally weak. This year, the problem has been exacerbated by Middle East unrest that led to a 40% rise in fuel costs, an earthquake and tsunami in Japan, and high unemployment in the U.S.

 

"However, March quarter 2011 results turned out to be much better than what anyone thought," he wrote. "U.S. airlines were essentially break-even on the operating line."

Moreover, oil prices now seem to be declining, capacity is tight, airlines have record liquidity just under $31 billion, and capital-expenditure growth is modest. Assuming fuel prices do not suddenly rise again, "we think the stocks could benefit from a strong contra-seasonal rally," Linenberg wrote.

 

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