Reeling from mounting fuel costs, airline stocks are getting pummeled. The Street continues to see them as outcasts and heavily laden with risks. But David Strine of Bear Stearns (BSC ), who is generally down on airlines, sees two exceptions to his dark view: He is upbeat about Alaska Air Group (ALK ) and AMR, parent of American Airlines (AMR ), and rates them "outperform." While other airlines have dived, both Alaska and AMR have risen: Alaska winged up from 26 in April to 33.61 on Aug. 24 and AMR from 10 to 13.55. (AMR was discussed in this column on Mar. 28 when it was at 8.) Strine says Alaska is trading at a discount to its peers and to its own historic multiples. Strine figures the stock will hit 40 by yearend. The airline posted second-quarter profits of 74 cents a share -- higher than Strine's forecast of 65 cents. Because of an improving revenue outlook, he has raised his earnings forecast for 2005 from $1.61 a share to $1.90, and for 2006 from $3.30 to $3.50. He notes Alaska is well fixed for fuel, with 50% of its needs hedged for the rest of 2005 at $30 a barrel, 41% in 2006 at $40, and 20% in 2007 at $45. Alaska serves more than 80 U.S. cities, plus Cana-da and Mexico. Ray Neidl of Calyon Securities rates Alaska "add," with a price target of 38. On AMR, Strine says it has a "substantially lower liquidity risk profile than its peers," given its $3.9 billion cash stash and its "more moderate cash burn." AMR is ex-pected to post a loss this year -- but much less than 2004's loss of $5.57 a share. Strine sees AMR earning 40 cents a share in 2006, up from his earlier estimate of 30 cents. Recent fare hikes, increased bookings, and declining competition in some markets helped, he says. Goldman Sachs also rates AMR "outperform."
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial