The company operates more than 3,100 flights per day and serves 198 communities around the globe. US Airways Group, Inc. (NYSE:LCC) expects to close the merger with AMR Corporation (PINK:AAMRQ) in the third quarter to become the largest domestic airline. The stock, though, was down around 6% at the lows of the day based in large part on the downgrade.
Analyst downgrade
Bank of America downgraded shares of US Airways Group, Inc. (NYSE:LCC) and lowered the price target on the stock to only $16. The analyst placed an underperform rating on the stock based on concerns that the proposed merger with AMR Corporation (PINK:AAMRQ) wouldn’t produce enough synergies in the short-term to justify a higher price.
One important factor to note when reviewing an analyst position is whether the previous prediction was accurate. Note that the analyst was previously neutral on the stock while it soared to $19.70 prior to the recent sell-off. Any analyst neutral or negative on the stock missed a significant run over the prior months. In reality, this downgrade didn’t change negative opinion by the analyst. If an investor believes in the story, this opinion shouldn’t be followed.
Best load factor for May
The intriguing part of the downgrade is that US Airways Group, Inc. (NYSE:LCC) reported a record load factor in May of 85.8% for mainline passenger traffic. The figure was up 1.7 points versus last May. More importantly the revenue passenger miles increased by 5.9% compared to the 3.9% increase for the available seat miles.
Most of the May and year-to-date traffic numbers at US Airways Group, Inc. (NYSE:LCC) and other airlines continue to suggest a major shift in the airlines focus away from market share towards profits.
Cheap earnings multiple
Clearly the market doesn’t fully believe in the airline industry yet. The stocks trade at some of the lowest multiples in the market by far. With the market approaching PE multiples of around 16, the top airlines all struggle to reach 6.
US Airways Group, Inc. (NYSE:LCC) trades at 5.5 times forward estimates yet the analyst placed an underperform on the stock. Fellow industry behemoths Delta Air Lines, Inc. (NYSE:DAL) and United Continental Holdings Inc (NYSE:UAL) trade at multiples closer to 6 times forward earnings.
With the consolidation in the industry and plans by Delta Air Lines, Inc. (NYSE:DAL) to legitimately return capital to shareholders, it seems unreal that investors are willing to unload the airline shares at such low valuation multiples.
Analysts expect earnings to surge at Delta Air Lines, Inc. (NYSE:DAL), reaching over $3 in 2014 from earnings of just $1.88 in 2013. Revenue growth should be limited, but the company will be able to drive margins from less competitive pricing.
Analysts expect United Airlines to see earnings jump to $4.91 in 2014 from $3.65 this year. Trading at $31, the stock is extremely cheap based on any valuation analysis assuming the industry has moved away from the market share focus.
Bottom line
When most slow growth sectors such as utilities trade at earnings multiples of double that of airlines, investors should consider rotating sectors. Clearly the airlines have a history of disappointing the market, but the tide appears to have shifted with this last consolidation of AMR Corporation (PINK:AAMRQ) into US Airways.
Based on the May load factors and cheap earnings multiples, the analyst downgrade of US Airways Group, Inc. (NYSE:LCC) appears to provide a great buying opportunity instead of a reason to panic.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Disagreeing With Analyst Downgrade on US Airways originally appeared on Fool.com.
Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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