Despite capacity constraints and surging inflation, particularly in fuel prices, U.S. airlines recently reported that their earnings recoveries have accelerated in Q2, notes analyst Colin Scarola in CFRA Research's flagship newsletter, The Outlook.
Positive guidance revisions notwithstanding, airline shares have plummeted during Q2. Stock values going down while near-term earnings forecasts rise indicates investors are expecting a severe drop-off in airline revenues and earnings after an initial pent-up demand boom.
Declining real earnings for U.S. households is certainly a negative factor for future airline earnings, but this is only one piece of the story. And when considering other key factors that will influence travel spending and fuel prices during the remainder of 2022 and 2023, we think many U.S. airlines will continue to generate profit growth through 2023, justifying much higher stock prices.
A key reason for our positive airline view is that, despite declining real earnings, U.S. household bank accounts are about 4x larger than pre-pandemic. So while real household earnings may be on the decline, the pandemic era surge in household bank accounts is likely softening the blow, making consumers more comfortable with spending greater amounts on travel.
Many households may also pull back on durable goods spending over the next year or two after the pandemic stay-at-home boom, freeing up significant cash for travel in 2022-2023. Having spent more than usual on home items over the past two years, we think it’s reasonable to expect many households will redirect some money normally spent in this category to travel over the next several years.
Overall, we think the 20%-plus sell-off in airline stocks since April is generally a good buying opportunity, as we expect the firms will continue their recovery back to pre-pandemic earnings levels during 2022-2023.
Meanwhile, there are three stocks in the airlines sector that earn our highest "strong buy" rating of 5-STARS: Delta Airlines (DAL), with a target of $55; Southwest Airlines (LUV), with a target of $64; and United Airlines Holdings (UAL), with a target of $63.
