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This came out today.Credit Suisse: "For investors wondering whether the ugly tape over the past month represents a buying opportunity or a harbinger of more selling to come, we believe it is buying opportunity based on our proprietary capacity study (see companion report published today) and based on how airline stocks have traded historically. • Our Peak to Trough study focused on how the Big 3 (AMR, Delta, and United) traded preceding industry downturns going back to 1980 [during “normal” times]; we excluded 9/11 and its aftermath, which ultimately led to widespread bankruptcies. Based on the 9 instances we isolated where the Big 3 peaked and then fell (including the 1987 stock market crash and the subsequent downturn in the early 1990s), stock prices declined by about 37% on average. Declines ranged from -24% (1985) to -58% (and this 1989/1990 stock decline was exaggerated by a 1989 merger spike in stock prices). • The 5 stocks in our coverage universe have declined by about 33% on avg (06 peak to current price), which suggests any potential economic downturn has in good part, been already discounted. Airline Stock Price Seasonality Going back to 1990, we found airline stocks outperformed the S&P500 by 5.3% in 13 of the last 16 years in the month of October. Separately, per our 8/10/06 note, we found stocks rose 36% on avg following terrorism scares over the past 6 yrs. August Traffic Results Around the Corner August traffic will likely show softness given weakness in Transatlantic following UK airport hassle issues, which could cause the stocks to come under some pressure. However, we would not draw firm conclusions given UK airport operational problems lasted about a week; lower fuel prices a bigger 3Q06 EPS swing factor. Sector Thoughts: If key assumptions hold, airlines stocks look attractive given recent pullback. Stock weakness on Aug traffic results a buying opportunity based on historical airline stock performance and our current fundamental view of the industry. We’re forecasting the industry earns $1.7B in 3Q06 and a tiny profit in 4Q06. If we’re wrong about our outlook, it’s likely because the Fed “over-does” it and/or fuel spikes, under any which scenario, an economic downturn likely accelerates consolidation, a natural catalyst for the industry. Based on the recent sell-off, AMR is our top pick, followed by US Airways, JetBlue, and AirTran." |
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