Airline Stocks Are a Cheap Buy: Bernstein

While U.S. airlines have underperformed the broader market over the past month on fears of rising geopolitical tensions and higher fuel prices, one team of bulls on the Street views investors' concerns as overblown in light of higher global demand and an increase in pricing discipline. Against the backdrop of strong economic growth and savings from the GOP tax overhaul, airline stocks currently look cheap and are positioned to outperform in 2018, according Bernstein. (See also: Airlines' Malaise Could Produce Winners: JPMorgan.)

Bernstein's David Vernon, who has outperform ratings on shares of Delta Air Lines Inc. (DAL), American Airlines Group (AAL), Southwest Airlines Co. (LUV) and United Continental Holdings Inc. (UAL), sees United's earnings report, slated for after the closing bell on Tuesday, as a catalyst to move sentiment back into positive territory. 

Passing on Higher Costs to Consumers

Earlier this year, United's fourth-quarter earnings report sent shares of U.S. carriers crashing on fears of overcapacity in the coming years and more competitive headwinds driving a price war in the profit-hungry sector. Vernon believes that the selling is very much an overreaction, as a rise in demand should facilitate capacity discipline and allow airlines to pass on higher fuel prices onto consumers via raising fares. 

As for his overweight airline picks, the Bernstein analyst has slightly lowered his 12-month price targets to take into account a rise in fuel prices, yet remains confident that the group will maintain elevated levels of performance as underlying results remain strong.  The NYSE Arca Airline Index has slipped nearly 6% over the most recent month, bringing its year-to-date (YTD) loss to 2.1%, compared to the S&P 500's 0.5% decline over the month and 1% gain in 2018.

UAL, which is prone to big moves after reporting earnings, sank about 4% over the month, bringing its 12-month loss to nearly 5%. United is expected to report earnings of $0.49 per share on $8.97 billion in revenue for the most recent quarter.  (See also: Airline Stocks Plummet Amid Price War Worries.)

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