Morgan Stanley is out with a superb positive call on Airlines:
Firm is revising their estimates and price targets lower for $105/bbl oil and Morgan Stanley’s most up to date economic forecasts. Looking forward, as their Bull/Bear/Base summary highlights, they expect significant volatility in airline equities. However, contrary to the consensus view, the firm would not initiate short positions at current prices.
In fact, they believe airline equities are poised for a relief rally in the near-term and suggest that nimble investors position themselves accordingly across legacy airlines.They are still not recommending the space to long-term holders, but are on the lookout for a change in either 1) macro forecasts or 2) the potential for a “Tipping Point” catalyst.
They expect to see broad capacity cuts across carriers, specifically the legacy airlines, within the next month or two. Fundamentals are deteriorating, but if MSCo's EBITDAR estimates and expectation of multiple expansion is correct, the stocks have already priced in a relatively bearish outlook (base case).
Following the consensus view on airlines has historically been an unprofitable strategy. Over recent years, broad changes in consensus have led to the reverse outcomes in airline share performance. The recent numerous airline downgrades across the sell-side should pique the interest of investors looking for outsized returns.
Firm uses AMR as an example of this effect due to its relatively long price history which is uninterrupted by bankruptcy. This suggests that the next immediate absolute move in AMR is likely to be higher (as they expect it to be for the industry if they are correct about a relief rally).
Notablecalls: Wonderful call by MSCO's William Greene. I expect AMR (NYSE:AMR) to move up today following these positive comments.
- First, AMR showed me yesterday that it can move upward. We had a rumor on NCN yesterday that British Airways has sent a letter to AMR board with 3,2bln (about $13/ share) offer to acquire the airline. The stock made a swift 10% upward move intraday (I'm sure you can spot it on the chart). The path of least resistance is up!
- Secondly, my gut is telling me oil is coming down at least in the near term. That should boost airlines.
I would also keep an eye on Southwest (NYSE:LUV), the only Overweight rated Airline stock under MSCO's coverage.