The potential of the airlines is reduced from 50 to 35% due to the rebound and the cut in valuations

The potential of the airlines is reduced from 50 to 35% due to the rebound and the cut in valuations

If there is a sector that has been at the center of all eyes in recent weeks, it has been the airlines. The announcements of the different cabin crew strikes called by the unions have once again placed the firms in this branch in the forefront of news.

A handicap which they have to face, which is added to others of greater significance, such as the high costs derived from the rise in fuel prices (see attached information), the war in Ukraine and the shortage of personnel at airports, which has caused for example Heathrow has recently had to force the cancellation of thousands of flights to avoid chaos and that German airports have been overwhelmed this summer.

However, those pitfalls have not stopped the evolution on the stock market of the most important firms in this area, which accumulate an increase of more than 10% since in mid-July they marked their lowest level in recent years (since the worst moments of the pandemic, specifically). In fact, this sector is among the most bullish of the Stoxx 600, where only technology, consumer goods and industrial firms outperform in the markets. And it is that the investor only seems to have his eyes on the explosion in passenger demand seen in recent months.

Despite bouncing more than 10% from monthly lows, average investment firms continue to cut their price targets for airlines

Yes indeed this recent optimism in the stock market is not reciprocated by analysts, who look beyond the short term. Despite rebounding more than 10% from the lows of the month, the average investment firm continues to cut its price targets for airlines. As collected from BloombergSo far this year, the average valuation of companies in the sector in Europe has been reduced by almost 15%.

Rising fuel and personnel costs threaten European airlines’ margins despite uptick in trafficassures Azza Chammem, senior analyst at Scope Rating, who warns that only airlines “with flexible fleets and routes and ample economic resources to continue investing in more efficient aircraft will probably emerge unscathed from the headwinds facing the sector “.

We put the magnifying glass on the air sector

The cuts in valuations and the increase in the price of their shares have meant that European companies in the sector now have on average around 35% potential for the next 12 months, compared to 50% they enjoyed just a few months ago, at the beginning of March. However, that percentage of revaluation would not even be enough for its shares to trade, again, close to the levels at which they moved before the pandemic, which are still almost 50% away.

“The European aviation sector is currently struggling to cope with the underlying recovery in air travel demand after the pandemic,” they point out from the JP Morgan analysis department, from where they place special emphasis on the staff shortages affecting airlines, airports and suppliers and in strikes.

“Looking ahead, the risk is that there will be new disturbances and capacity cuts as the peak demand season progresses,” they highlight from the Yankee firm and stress that beyond the summer, the outlook is increasingly worrying if inflationary pressures on costs are added to demand pressures on revenues.

IAG has the support of analysts

The largest firms in this sector have reaped an enviable upward trend in recent weeks. The best example is staged IAG, Ryanair and Easyjet which rebounded more than 10% from the lows of the month of July, ranking as well as the firms that rose the most in the branch in that period of time. This behavior exceeds that accumulated by the other major competitors in the air sector, such as Lufthansa that manages to accumulate earnings of more than 7% in the same period.

In the case of the Anglo-Spanish holding company, analysts still give it a potential close to 40% by 2023. July is serving to emphasize the profits close to 18% accumulated by the company led by Luis Gallego since it marked its lowest level on the stock market in the last two years, on July 5. Only 4% of the nearly 25 analysts who follow it advise undoing positions in the company according to the market consensus collected from FactSet.

“IAG expects a significant improvement in operating profit in the third quarter, after publishing its first positive result since the pandemic”, they point out from Bank of America while echoing that it managed to beat consensus estimates thanks mainly to higher-than-expected returns. planned. “We increased our EBIT estimate for the full year by 26%up to 493 million euros, as a result of the improvement in the second quarter and despite our forecast of lower capacity, and we expect a slightly lower net debt”, sentence the same analysts


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