CFRA Research is a leading independent research firm; it uses a differentiated proprietary methodology that blends forensic accounting and fundamental equity research. In its flagship newsletter, The Outlook, analyst Colin Scarola reviews two airline stocks that continue to warrant buy ratings.

CFRA raises its STARS rating on shares of Delta Airlines (DAL) to Strong Buy from Buy, while we keep our target price at $55 per share — 12x our 2022 EPS estimate (raised to $4.49 from $4.31; 2021 cut to -$3.82 from -$2.57).

Q1 adjusted EPS of -$1.07 beat consensus by $0.30. Q2 revenue was down 43% from the same period in 2019 and adjusted operating profit remained in negative territory at -$688 million.

The company turned an important corner in June, however, generating a positive pretax profit for the month despite revenue still down 40% from June 2019.

DAL is now on course to generate positive free cash flow for the remainder of the pandemic, with pandemic balance sheet deterioration now complete, in our view, eliminating a key risk for the stock going forward.

Shares have sold off about 20% since April even as the 2022 earnings outlook has greatly improved, in our view, leading to our upgrade to Strong Buy.

We expect the U.S. and other developed economies to be through low-hospitalization Delta variant waves by the end of Q3, setting the stage for a major resurgence of international and business travel in Q4.

Meanwhile, CFRA maintains a Buy rating on shares of United Airlines (UAL) as we lower our target price to $61 from $66, 20.5x our 2022 EPS estimate (cut to $2.98 from $4.11; 2021 to -$11.19 from -$8.07).

Q2 adjusted EPS of -$3.91 missed consensus by -$0.05. Q2 revenue jumped 70% vs. Q1 as vaccinations unleashed a surge of pent-up domestic leisure travel demand. But Q2 revenue was down 52% vs. Q2 2019, mostly due to temporary corporate and government restrictions on business and international travel, respectively, in our view.

UAL shares have dropped 20% since early June, largely due to fear of the Delta Covid-19 variant reversing the air travel demand recovery. This is unwarranted, in our view, as we see the Delta wave running its course in developed nations by September with no impact on UAL's long-term earning power.

We see UAL's monthly passenger-miles recovering 2019 levels by year-end 2022, leading to material upside for shares as the commonly held view that business and international travel demand will never fully recovery from the pandemic fades, in our view.

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