Buckingham says another 15-20% downside, or more, possible for airlines on broader spread of Covid-19
Shares of U.S. airline stocks are under pressure on Thursday after Deutsche Bank analyst Michael Linenberg downgraded American Airlines (AAL), Alaska Air (ALK), Delta Air Lines (DAL), JetBlue (JBLU), Spirit Airlines (SAVE) and United Airlines (UAL) to Hold, while his peer at Buckingham cut American, Allegiant (ALGT), Alaska Air, JetBlue, Southwest (LUV), Spirit and United to Neutral as well. Both analysts cited concerns about the increasing risk that the spread of the Covid-19 virus will disrupt travel patterns beyond just China
CORONAVIRUS RISK: Deutsche Bank analyst Michael Linenberg downgraded the aforementioned six airline stocks, all to Hold from Buy, given his concerns about the increasing risk that the spread of the Covid-19 coronavirus will disrupt travel patterns beyond just China. The analyst also expressed concern that the coronavirus will start to negatively impact peak travel periods - like spring break, Easter and early summer - and said he worries about the growing number of restrictions on business travelers, "one of the industry's most lucrative revenue streams."
Despite the concerns, Linenberg maintained Buy ratings on regional airlines Allegiant Travel, Mesa Air (MESA) and SkyWest (SKYW), noting that Mesa and SkyWest are contract carriers and roughly 75% of Allegiant's markets are sole-served.
Citing similar reasons, Buckingham analyst Daniel McKenzie downgraded American, Allegiant, Alaska Air, JetBlue, Southwest, Spirit and United to Neutral from Buy, as he believes demand impact from Covid-19 will likely prove "far greater than investors appreciate" based on the data he tracks. McKenzie said his firm's booking study this past Monday captured the near-collapse of demand to Asia last week, but noted that his earnings and ratings outlook did not contemplate the collapse spreading to other regions, which likely proves to be a flawed assumption based on CDC warnings.
While he had expected the stocks to fall another 10%-15%, he is now concluding that the pullback is likely going to be "stronger for longer." If the collapse in demand to Asia is a sign of things to come in other geographic entities, the stocks are not even close to discounting the potential demand fallout from a broader spread of Covid-19, McKenzie contended. He views another 15-20% downside
, or potentially more, as likely, depending on the severity of the economic fallout from the virus. McKenzie slashed his price target on American shares to $20 from $42, cut his Allegiant target to $126 from $219, lowered his Alaska Air target to $51 from $84, trimmed his JetBlue target to $15 from
$25, lowered Southwest's target to $43 from $67, lowered his target for Spirit to $30 from $57 and cut his United target to $61 from $105.
PRICE ACTION: In morning trading, shares of American Airlines, Alaska Air and JetBlue have each dropped about 4%, Delta Air Lines' stock has slid 1%, Spirit Airlines has fallen over 5%, and Allegiant and Southwest have slid about 3% apiece. Meanwhile, United Airlines shares are fractionally higher.