On Tuesday, Morgan Stanley began coverage of LatAm Airlines Group (NYSE:LTM) stock with an Overweight rating and established a price target of $40.00. The firm highlighted the airline's valuation as significantly lower compared to its pre-pandemic levels, suggesting a potential for re-rating.
LatAm Airlines Group's current trading multiple of 7.6x next twelve months' (NTM) earnings per share (EPS) represents a 55% reduction from its valuation before the global health crisis. This contrasts with the performance of U.S. legacy carriers, whose price-to-earnings (P/E) multiples have only decreased by an average of 9% from their pre-pandemic figures.
The earnings recovery trajectory for LatAm legacy carriers also stands out, with LatAm Airlines Group and Copa showing substantial recovery compared to their U.S. counterparts. Specifically, LatAm Airlines Group's net income for the second quarter of 2024 trailing twelve months (TTM) is 277% of what it was in the fourth quarter of 2019, while U.S. legacy carriers' net income is still down by 19% over the same period.
Morgan Stanley's analysis, which included a linear regression of global airlines assessing P/E multiples against EPS growth, dividend yields, and share price volatility, indicates that LatAm Airlines Group's stock has room for a 32% upside in its P/E multiple.
This assessment underpins the firm's position that a theoretical re-rating of the airline's multiple is justified given its strong earnings recovery and current undervaluation.
Citi Reinstates Coverage on LatAm Airlines Group with Neutral Rating and $26.50 Price Target
In other recent news, Citi has reinstated coverage on LatAm Airlines Group with a Neutral rating and a price target of $26.50. This reinstatement follows notable operational and balance sheet improvements by the airline. Despite these advancements, Citi maintains that it's challenging to justify a valuation premium for LatAm Airlines compared to its competitor, Copa.
Citi's analysis indicates that while LatAm Airlines has made significant strides in its performance, its market valuation should remain on par with industry peers.
The firm's neutral outlook is also influenced by the upcoming expiration of a lock-up agreement in late November, which could potentially lead to a short-term overhang risk on LatAm Airlines' shares. The expiration of this agreement may allow for the sale of shares that were previously restricted, possibly affecting the stock's stability in the near term.
The price target of $26.50 mirrors Citi's assessment of LatAm Airlines' market position following the suspension of its previous rating. This target reflects the firm's expectation of the airline's stock performance in the current market context. LatAm Airlines Group has not provided any comment on the new rating and price target.
InvestingPro Insights
Recent data from InvestingPro adds weight to Morgan Stanley's bullish stance on LatAm Airlines Group (NYSE:LTM). The company's P/E ratio of 13.23, and an even lower adjusted P/E of 10.36 for the last twelve months as of Q2 2024, aligns with Morgan Stanley's observation of the airline trading at a discount compared to its pre-pandemic valuation. This is further supported by an InvestingPro Tip indicating that LTM is "Trading at a low earnings multiple."
The company's financial health appears robust, with revenue growth of 16.98% over the last twelve months and an impressive EBITDA growth of 47.36% for the same period. These figures underscore the strong earnings recovery trajectory highlighted in the Morgan Stanley analysis.
An additional InvestingPro Tip notes that LTM is a "Prominent player in the Passenger Airlines industry," which could contribute to its potential for re-rating as the sector continues to recover. Investors seeking more comprehensive insights can access 8 additional tips on InvestingPro, providing a deeper understanding of LTM's market position and potential.
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Analysis:
In summary, Morgan Stanley and Citi have differing perspectives on LatAm Airlines Group, with Morgan Stanley bullish on the stock due to its strong earnings recovery and undervaluation, while Citi takes a more neutral stance citing challenges in justifying a premium valuation. Investors should consider the potential for a re-rating of LatAm Airlines Group's stock as it continues to show resilience in the face of the global health crisis and operational improvements. The upcoming expiration of a lock-up agreement could introduce short-term volatility, but the long-term outlook remains positive for the company.