1、North America Equity Research02 October 2019Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($mn)Price($)CurPrevCurEnd DatePrevEnd DateAlaska Air Group,Inc.ALK US8,073.3564.95OWn/c79.00Dec-2076.00Dec-19American AirlinesAAL US11,941.7326.80OWn/c40.00Dec-20n/cDec-19Delta Air Line
2、s,Inc.DAL US37,170.5257.01OWn/c78.00Dec-20n/cDec-19JetBlue Airways Corp.JBLU US4,988.7516.53Nn/c23.00Dec-2021.00Dec-19Southwest Airlines Co.LUV US28,926.5453.37UWn/c58.00Dec-2052.00Dec-19United Airlines Holdings IncUAL US22,961.3887.84OWn/c122.00Dec-20110.00Dec-19Spirit AirlinesSAVE US2,462.0935.88O
3、Wn/c51.00Dec-2054.00Dec-19Source:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 01 Oct 19.US AirlinesHousekeeping update;establishing 2020 Price TargetsAirlinesJamie Baker AC(1-212)622-Bloomberg JPMA BAKER Abdul Tambal,CFA(1-212)622-J.P.Morgan Securities LLCSee page 20 fo
4、r analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider thi
5、s report as only a single factor in making their investment decision.Its that time of year.We are introducing 2021 estimates for US Airlines,and re-establishing price targets predicated on year-end 2020(vs.our now-retired 2019 targets).The resulting changes in price targets are comparatively muted(a
6、nd in a few cases,wholly unchanged),with no substantive revisions to our underlying valuation methodology.Our models are yours for the asking.2North America Equity Research02 October 2019Jamie Baker(1-212)622-Alaska Air Group,Inc.OverweightCompany DataShares O/S(mn)12452-week range($)74.83-53.39Mark
7、et cap($mn)8,073.35Market cap($mn)8,073.35Exchange rate 1.00Free float(%)99.6%3M-Avg daily vol(mn)0.993M-Avg daily val($mn)62.0Volatility(90 Day)24Index RUSSELL 2000BBG BUY|HOLD|SELL 10|6|0Alaska Air Group,Inc.(ALK;ALK US)Year-end Dec($)FY17AFY18AFY19EFY20EFY21E(Prev)FY21E(Curr)Revenue($mn)7,8948,26
8、48,7609,311-9,807Adj.EBITDAR($mn)1,9631,5101,8462,056-2,177EBITDAR margin 24.9%18.3%21.1%22.1%-22.2%A income($mn)791554776926-1,002Adj.EPS($)6.374.476.297.60-8.33BBG EPS($)6.624.405.936.94-7.45Reported EPS($)6.374.476.297.60-8.33DPS($)1.201.281.370.00-0.00Dividend yield 1.8%2.0%2.1%0.0%-0.0%Adj.P/E
9、10.214.510.38.5-7.8Source:Company data,Bloomberg,J.P.Morgan estimates.Investment Thesis,Valuation and RisksAlaska Air Group,Inc.(Overweight;Price Target:$79.00)Investment ThesisWhile the Virgin acquisition was ultimately appropriate given Alaskas scale and ambition to become a national carrier,the i
10、ntegration of a lower-margin franchise,combined with an ultra-competitive set of markets in California,has resulted in more financial headwinds than we had previously estimated.That said,we are beginning to witness competitive easing in overlap markets at Alaskas San Francisco hub,and competitive ca
11、pacity trends in Seattle overlap markets have also been improvinsg.Furthermore,Transcon pricing has firmed from a troubling low identified in March to levels that we no longer believe will prove destructive to Alaska RASM.Finally,Southwests MAX-related capacity neutering is anticipated to pressure u
12、nsold capacity at that franchise,in turn potentially leaving Alaska in an advantageous position to exploit last-minute corporate demand.As such,we view Alaska PRASM aspirations as currently among the most easily achievable in the sector,which we anticipate will drive improved sentiment on the name.V
13、aluationWe establish our ALK Dec 2020 price target of$79.00 whichis predicated on our company-specific forward P/E multiple assumption.We arrive at our price target for Alaska by applying a 10.0 xP/E multiple to our 2021EPS estimate.For context,we utilize the same multiple for Southwest and a lowerm
14、ultiple for Spirit(9.0 x)and JetBlue(8.5x).Standalone Alaska(pre-Virgin)typically traded at a premium to the rest of the group,but the market no longer assigns such a premium due to the complications of integration risk as well as lower aggregate financial output of the combined company,in our view.
15、ALK shares have experienced a 3x P/E valuation compression measured on consensus NTMestimates since its autumn 2018 peakmostly a result of industry-wide revenue deceleration fears on account of cheaper fuel,as well as continued(albeit improving)pressure in its Virgin acquired markets,in our view.Ris
16、ks to Rating and Price TargetTo the downside:If ALK expands capacity growth faster than expected in 2019,our estimates and rating may be lowered;if the idiosyncratic revenue initiatives do not materialize or are delayed in timing,we may lower our estimates;if the company is unable to bolster the loy
17、alty of high-value travelers acquired in the Virgin transaction,we believe revenue forecasts could become impaired.3North America Equity Research02 October 2019Jamie Baker(1-212)622-American AirlinesOverweightCompany DataShares O/S(mn)44652-week range($)40.58-24.23Market cap($mn)11,941.73Market cap(
18、$mn)11,941.73Exchange rate 1.00Free float(%)89.0%3M-Avg daily vol(mn)6.873M-Avg daily val($mn)199.3Volatility(90 Day)40Index S&P 500BBG BUY|HOLD|SELL 12|8|2New American Group(AAL;AAL US)Year-end Dec($)FY17AFY18AFY19EFY20E(Prev)FY20E(Curr)FY21E(Prev)FY21E(Curr)Revenue($mn)42,62344,54146,04048,46648,4
19、66-50,607Adj.EBITDAR($mn)7,8656,5546,8547,2966,747-7,195EBITDAR margin 18.5%14.7%14.9%15.1%13.9%-14.2%A income($mn)2,5922,1182,1982,6382,220-2,561Adj.EPS($)5.274.554.916.005.05-6.00BBG EPS($)4.894.514.92-5.44-5.96Reported EPS($)5.274.554.916.005.05-6.00DPS($)-Dividend yield-Adj.P/E 5.15.95.54.55.3-4
20、.5Source:Company data,Bloomberg,J.P.Morgan estimates.Investment Thesis,Valuation and RisksNew American Group(Overweight;Price Target:$40.00)Investment Thesis Despite the industrys revenue momentum in 2018,American shares were a noteworthy laggard,the worst performing stock at-38%in 2018.Fundamentall
21、y,we believe Americans 2019 capacity growth plan of 1.5%endorses a pattern of capacity restraint that we believe will help set 2018 results as a margin support level.But we acknowledge investor frustration with Americanwhile Delta delivers industry-leading margins and new revenue initiatives,and whi
22、le Uniteds turnaround plan appears to be working and winning over investors confidenceAmericans revenue story has been third-best and its ancillary efforts have lagged those of peers.The primary rationale we see for owning AAL shares is the valuation dislocation relative to peers.Indeed,American sha
23、res recently triggered our proprietary Down 30 in 30 rule,and we believe sentiment is bottoming out.We do not necessarily believe the companys balance sheet strategy is prudent in what feels like a late-cycle environment,but we do not envision any liquidity/solvency concerns despite some investor co
24、ncerns.In other words,at this valuation level,we believe investors are more than compensated for lower margins and a riskier balance sheet.Accordingly,we rate American shares Overweight.ValuationWe establish our AAL Dec 2020 price target of$40.00 which is predicated on our company-specific forward P
25、/E multiple assumption.We are applying a 6.5x P/E multiple to our 2021 estimate to arrive at our price target.For context,we assume higher multiples at both Delta and United(9.5x for DAL and 8.5x for UAL,reflecting a 2-3x compression from their respective trading levels from the autumn 2018 peak due
26、 to the potential nearing of the economic cycle and continued investor dissatisfaction with current revenue momentum,which has a de-rating effect on equities)to reflect Americans enhanced balance sheet risk and lower projected margin profile.AAL shares have experienced a 3x P/E valuation contraction
27、 sincethe autumn 2018 peak when measured on a NTM basis,and we believe this is a function of investor concern on Americans leverage as well as slowing industry revenue momentum on account of cheaper fuel.4North America Equity Research02 October 2019Jamie Baker(1-212)622-Risks to Rating and Price Tar
28、getTo the downside:if jet fuel prices rapidly move higher and American is unable to recoup higher input costs through stronger fares;if Uniteds growth plans in Chicago erode Americans profitability in its hub;if the Latin American region,where American has outsized exposure,suffers from further macr
29、oeconomic headwinds.5North America Equity Research02 October 2019Jamie Baker(1-212)622-Delta Air Lines,Inc.OverweightCompany DataShares O/S(mn)65252-week range($)63.44-45.08Market cap($mn)37,170.52Market cap($mn)37,170.52Exchange rate 1.00Free float(%)88.8%3M-Avg daily vol(mn)5.753M-Avg daily val($m
30、n)341.5Volatility(90 Day)22Index S&P 500BBG BUY|HOLD|SELL 16|6|0Delta Air Lines,Inc.(DAL;DAL US)Year-end Dec($)FY17AFY18AFY19E(Prev)FY19E(Curr)FY20E(Prev)FY20E(Curr)FY21E(Prev)FY21E(Curr)Revenue($mn)41,138 44,194 46,820 46,813 49,923 49,630-51,768Adj.EBITDAR($mn)8,3007,9399,6279,535 10,2689,649-10,1
31、08EBITDAR margin 20.2%18.0%20.6%20.4%20.6%19.4%-19.5%A income($mn)3,4613,8814,7354,6385,2004,723-5,065Adj.EPS($)4.805.607.267.118.207.46-8.20BBG EPS($)4.855.57-7.12-7.48-7.94Reported EPS($)4.805.607.267.118.207.46-8.20DPS($)1.021.261.401.401.421.42-1.42Dividend yield 1.8%2.2%2.5%2.5%2.5%2.5%-2.5%Adj
32、.P/E 11.910.27.98.07.07.6-7.0Source:Company data,Bloomberg,J.P.Morgan estimates.Investment Thesis,Valuation and RisksDelta Air Lines,Inc.(Overweight;Price Target:$78.00)Investment Thesis Simply put,we continue to view Delta as the industry leader.Delta generates the highest margins of the legacy air
33、lines(and we believe this is at least partly structural),the company is the leading innovatorcreating Basic Economy,for examplethe management team is widely viewed as the most savvy,and its balance sheet is the strongest of any legacy carrier in the history of the industry.When these are combined wi
34、th disciplined capital spending,favorable capital returns programs for both dividends and share buybacks,and near-term shelter from federal cash tax payment,we believe the investment case for Delta is quite compelling.While we believe that longer-term sector re-rating will favor DAL shares,one doesn
35、t need to assume much multiple expansion for meaningful equity upside given the margin and earnings momentum at the companys back.Accordingly,we rate DAL shares Overweight.ValuationWe establish our DAL Dec 2020 price target of$78 which represents a 9.5x P/E multiple on our 2021 estimate.For added co
36、ntext,we apply a higher multiple for Delta relative to United(8.5x)and American(6.6x),given Deltas leading financial output in its legacy airline peer set.Delta shares are currently trading at 7x 2019E EPS on a consensus basis,though they have traded in excess of 10 x as recently as November 2018.We
37、 believe the multiple contraction is a result of slowing revenue momentum on account of cheaper fuel,and also two recent guidance missteps.Risks to Rating and Price TargetDownside risks include:jet fuel prices rapidly escalate and Delta is unable to offset higher input costs with stronger fares;cont
38、inued investor perception of unreliable near-term guidance;ULCC competition heightens and Deltas ability to raise fares is diminished;and Deltas growth in Boston and Seattle are met with enhanced competitive response.6North America Equity Research02 October 2019Jamie Baker(1-212)622-JetBlue Airways
39、Corp.NeutralCompany DataShares O/S(mn)30252-week range($)19.83-15.19Market cap($mn)4,988.75Market cap($mn)4,988.75Exchange rate 1.00Free float(%)99.4%3M-Avg daily vol(mn)4.333M-Avg daily val($mn)77.9Volatility(90 Day)27Index RUSSELL 2000BBG BUY|HOLD|SELL 6|11|2JetBlue Airways Corp.(JBLU;JBLU US)Year
40、-end Dec($)FY17AFY18AFY19EFY20E(Prev)FY20E(Curr)FY21E(Prev)FY21E(Curr)Revenue($mn)7,0127,6588,1348,9308,868-9,617Adj.EBITDAR($mn)1,5411,2951,4621,7171,654-1,837EBITDAR margin 22.0%16.9%18.0%19.2%18.7%-19.1%A income($mn)557491583740693-830Adj.EPS($)1.691.561.932.502.34-2.85BBG EPS($)1.771.511.91-2.36
41、-2.62Reported EPS($)1.691.561.932.502.34-2.85DPS($)-Dividend yield-Adj.P/E 9.810.68.66.67.1-5.8Source:Company data,Bloomberg,J.P.Morgan estimates.Investment Thesis,Valuation and RisksJetBlue Airways Corp.(Neutral;Price Target:$23.00)Investment Thesis JetBlue disclosed an ambitious set of goals at it
42、s 2018 investor day,namely that the company is targeting$2.50-$3.00 of EPS by 2020,a more than 80%increase at the midpoint from expected 2018 EPS.While JetBlue outlined several commercial initiatives related to further cabin segmentation/unbundling,harvesting its scale in hubs and focus cities,the c
43、ontinued success and growth of its Mint product offering,and enhanced loyalty program economics,the key area of investor scrutiny for JetBlue has been the companys relatively weak track record of cost control.Management has reiterated its 0-1%ex-fuel CASM CAGR for 2018-2020,with flat to+2%as the 201
44、9 benchmark and-0.5%to-2.5%in 2020.We view this cost trajectory as ambitious,but we believe the comprehensive review of maintenance programs/fleet,management redundancies,airport expenses,and sales/distribution programs has a credible probability of success.However,fundamentals aside,we fail to iden
45、tify sufficient near-term catalysts that we believe could propel shares meaningfully higher.Additionally,following the recent several weeks of airline equity volatility,we believe the risk-to-reward is more compelling for SAVE(Overweight)among the domestic airlines.Accordingly,we rate JBLU shares Ne
46、utral.ValuationWe establish our JBLU Dec 2020 price target of$23.00 which is predicated on our company-specific forward P/E multiple assumption.We are applying an 8.5x P/E multiple to our 2021 estimate to arrive at our price target for JetBlue.For context,this is the lowest target multiple for the d
47、omestic focused airlines we cover:Southwest and Alaska both 10.0 x and Spirit 9.0 x.JBLU shares have experienced a 4x P/E valuation compression measured on consensus NTM estimates since its autumn 2018 peakmostly a result of industry-wide revenue deceleration fears(on cheaper fuel)but also on accoun
48、t of the market not fully embracing the companys 2020 guidance targets,in our view.7North America Equity Research02 October 2019Jamie Baker(1-212)622-Risks to Rating and Price TargetTo the downside:1)If JetBlues credibility on attaining its 2019 and 2020 ex-fuel CASM targets is diminished;2)JetBlue
49、is growing head-to-head with Delta in the Boston market,and any near-term oversupply could result in unit revenue headwinds;3)if the benefits from the A220 fleet are lower than currently expected;4)nearly 30%of the companys capacity is deployed in“sun,saltwater,and sand”destinations in Florida and t
50、he Caribbean,and any further scares related to hurricanes/weather could result in reduced demand for travel on JetBlue.To the upside:1)If JetBlue can demonstrate meaningful progress on its 2019 ex-fuel CASM outlook,we believe JBLU shares would respond favorably;2)if the company is able to articulate
