This last week of April is bringing us another round of the market volatility that we’ve been seeing all year. Conditions like these – featuring sharp swings both up and down – are confusing but not necessarily bad for investors. There are opportunities to be found, and that’s the key point in the view of CNBC’s Jim Cramer. In fact, Cramer is not shy about making two specific recommendations for investors given today’s market conditions.
Cramer is recommending airline stocks. Not the smaller discount carriers, but two of the big names among the major players. He believes that these airlines, with their long-term reputations for bringing returns through strong revenues, are the way to go right now.
“There’s always a bull market somewhere and right now it’s flying at 30,000 feet high. My favorites are the two most profitable. Just remember to ring the register gradually on the way up, because remember, these are airlines. They tend to be a very boom and bust industry,” Cramer opined.
Morgan Stanley analysts have looked into the engines of both of those airlines. Let’s see what they have to say.
Alaska Air (ALK)
For the first Cramer pick we’ll look at Alaska Air, the sixth-largest airline in the North American market. Alaska got its start in its namesake state, but is currently based at the Seattle-Tacoma airport in Washington State, near the geographical center of the North American Pacific Coast. The airline serves Alaska, the Pacific Northwest, including the Canadian province of British Columbia, and points further south on the West Coast into Mexico. Alaska Air functions has both a full service airline and a connector carrier, and has an excellent reputation for service safety.
In part, that safety reputation is built on its habit of keeping the air fleet up to date. In March of this year, the company announced that it had negotiated new terms with Boeing on its previous agreement to purchase new aircraft. Under the updated agreement, Alaska will switch its purchase to include newer model 737-10s, with larger capacity, and 737-8s, with longer range. The majority of the purchase will remain 737-9 models. Also in March, Alaska Air announced that it is converting two passenger model 737-800 aircraft into dedicated air freighters, increasing the company’s air freight fleet from 3 planes to 5. The move puts Alaska Air in a better position to respond to supply chain and cargo connection needs in North America.
In April of this year, Alaska Air cut back on the number of scheduled passenger flights by 2% going forward. This move was taken in response to a pilot shortage that had caused the airline to cancel flights and strand passengers.
Also this month, Alaska Air reported its 1Q22 financial results. The $1.68 billion at the top line was down sequentially, by 11% from 4Q21, but was up 110% from 1Q21. While EPS came in at net loss, Alaska Air did have $2.9 billion in unrestricted cash on hand at the end of the first quarter.
Morgan Stanley analyst Ravi Shanker covers Alaska Air, and takes a bullish view of the company. He writes: “ALK’s 1Q result and conf. call reinforced what we have heard from the other Airlines so far that the industry is in the early innings of entering a sweet spot on revenue momentum…”
“The LT growth story remains intact as ALK will be a winner of the rising tide/sweet spot with the added boost of idiosyncratic catalysts ($400mm in incremental revenue from the new credit card agreement, fleet renewal including $70mm from upgauging, mix and network efficiencies and alliances). This should allow earnings growth to exceed the rising tide…”
Shanker admits the headwinds here – rising fuel costs and an ongoing pilot shortage – but he does not believe that either will derail Alaska Air’s ability to show y/y revenue growth.
To this end, the analyst rates ALK an Overweight (i.e. Buy), and his $75 price target implies a 39% upside potential in the coming year. (To watch Shanker’s track record, click here)
Overall, with 9 positive analyst reviews on file, supporting a Strong Buy consensus rating, it’s clear that Shanker’s view is mainstream here. The stock is selling for $53.86 and has an average price target of $77.44, suggesting ~44% upside. (See ALK stock forecast on TipRanks)
Delta Airlines (DAL)
The second of Cramer’s airline calls is Delta, one of the largest airlines in the US. The company, based in Atlanta, boasted over 5,400 daily flights to 325 locations in 52 countries before the corona pandemic hit. Today, with the pandemic receding and both business and consumer air travel expanding, Delta is showing a strong recovery. The company has some 4,000 daily flights, landing in 275 destinations around the world.
Delta’s recovery is visible in the financial numbers. In 1Q22 earnings, reported this month, Delta showed an adjusted operating revenue of $8.2 billion. This indicated a 79% recovery from the same quarter in 2019 – pre-pandemic – and was based on an 83% recovery in air traffic capacity. Delta had, at the end of Q1, approximately $12.8 billion in liquid assets, including cash, short term investments, and undrawn credit.
Looking forward to the June quarter, Delta expects that its recovery will continue. The company has provided guidance showing a likely 93% to 97% recovering in total revenue for 2Q22 compared to 2Q19. The company is comparing to 2019 to account for the industry disruptions caused by the COVID crisis in 2020.
Checking in with Morgan Stanley’s Ravi Shanker again, we find that he is sanguine about Delta’s prospects going forward.
“Despite no shortage of black swan events, we remain bullish the US Airlines and DAL, in particular, because we believe the best is yet to come. The best mix is ahead of us as corporate and international push toward normalization. Pent up demand continues to swell. The best operating leverage is ahead of us as capacity outpaces resource addition and strong yields drop through to the bottom line,” Shanker wrote.
“DAL is likely to be the biggest beneficiary of incoming investor interest due to its size, franchise strength, mgmt. team as well as fundamentals, including exposure to the corporate and international rebound and de-leveraging thesis,” the analyst summed up.
Shanker’s comments are in line with his Outperform (i.e. Buy) rating on DAL, and his $65 price target indicates confidence in a 55% upside potential for the next 12 months.
All in all, this major airline has attracted a lot of Wall Street attention; it has 13 recent analyst reviews and these include 12 to Buy against just 1 Hold, for a Strong Buy consensus rating. The stock is currently trading for $41.90 with an average price target of $52.18. This implies a one-year upside growth potential of ~25% for Delta. (See DAL stock forecast on TipRanks)
To find good ideas for airline stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.