Despite high fuel prices, too much capacity in the market, and a slumping U.S. economy, New York-based UBS analyst Kevin Crissey is upgrading most of the legacy carrier’s stocks south of the border after a recent drop off in their stocks, and the prospect of some M&A activity in the industry in the coming months.
“We’ve maintained for quite a while that outside of hopes for industry consolidation we saw no compelling reason to own the U.S. airline stocks. We’ve argued that air travel demand will soften and that, if fuel prices remain high, the stocks are overvalued,” Mr. Crissey said in a note to clients Wednesday.
“We still believe this to be true, but the stocks look less overvalued given the recent pullback.”
In addition, he said he expects a “major merger” in the industry within the next six months, which would likely send the U.S. legacy carrier’s stocks soaring 20% to 30% on the day of the announcement. He said his top picks are Northwest Airlines (NWA) and Continental Airlines (CFUL-OB), because a merger is most likely to occur between Delta (NYSE:DAL) and Northwest. That would likely force Continental to act, as well, he said.
“Given the collapse of the sector throughout 2007 and into 2008 and our expectation that a merger will be announced soon, we now find the upside/downside risk to the sector favoring upside,” he said.
Mr. Crissey upgraded Continental, Delta Airlines, Northwest (NWA), United (UAUA) and U.S. Airways (LCC) from ‘neutral’ to a ‘buy’ on Wednesday. He also upgraded American Airlines from a ‘sell’ to ‘neutral.’