Goldman: United Airlines, JetBlue Should Outperform Peers

Investors who think Tuesday’s fall in the markets might be good opportunity to jump into soaring U.S. airline stocks might want to keep their money parked at the gate.

Robert Barry, an analyst with Goldman Sachs, said in a research note that he sees relatively little upside in most U.S. airline stocks thanks to higher oil estimates, slower economic growth and difficult year-over-year sales comparisons in 2007.

As well, he said the prospects of further consolidation in the industry appears “dim,” although not entirely nonexistent.

“We continue to think airline fundamentals are quite good ... but we think U.S. airline stocks are momentum driven,” Mr. Barry said.

But while the sector as a whole may not be attractive, Mr. Barry said his top picks are UAL Corp.’s United Airlines (UAUA) and JetBlue Airways Corp. (JBLU).

He said he likes United’s strong free cash flow prospects, distant aircraft replacement needs, lack of near-term debt maturities, union contracts that don’t expire for three more years and an attractive valuation.

As for JetBlue, which earlier this month suffered a winter storm meltdown, Mr. Barry said revenue and cost containment initiatives underway could yield gains for investors.

Comments

[Frank Li:]

Notes from the Ira Sohn dinner in May on EK. The notes were taken in real time, and may contain transcription errors:

<blockquote>
<b>Bill Miller- Legg Mason Capital Management</b>

<b>Long UAUA- United Airlines</b>

13% Free cash flow
No need for new aircraft for 8 years.
Equates to Wilbur Ross steel turnaround.
UAUA network should garner a 60% premium to top competitor AMR and 2 to 3 times other competitors.
Management is a proponent of consolidation
Miller believes a consolidation makes company even more valuable UAUA +DAL =3 (1+1=3).
If fuel continues to go up it will prompt faster consolidation. If fuel costs decline airlines benefit even more, and consolidation still an option.
UAUA should generate its entire market cap in free cash flow in the next 3 yrs.
No pension or health care liabilities

<blockquote>

2007 Jul 20 06:47 AM