Morgan Stanley says this airline stock is cheap, due for 50% comeback

It’s only up from here for Latam Airlines Group , according to Morgan Stanley. The bank initiated the airline carrier at an overweight rating and named it a top pick. Analyst Jens Spiess simultaneously set a price target of $40, which is approximately 51% above the stock’s $16.41 closing price on Monday. Shares of Latam Airlines relisted on the New York Stock Exchange in July, after the company filed for bankruptcy in 2020. From its closing price on its first day of trading, the stock has risen nearly 7%. LTM YTD mountain LTM YTD chart However, Spiess believes that Latam Airlines’ valuation still offers a steep discount, which the analyst said was “unwarranted.” “LTM is trading at a 55% discount vs. its pre-pandemic level. This is in stark contrast with how valuation of U.S. legacy carriers has evolved after the pandemic,” the analyst wrote. “Even more surprisingly, LTM’s earnings have recovered well above pre-pandemic levels, while those of U.S. legacy carriers are, on average, still lagging.” This steep discount is especially unjustified when considering that full service carriers, such as Latam Airlines, have finally begun to outpace their low-cost carrier counterparts after decades of underperformance, the firm said. The company has also made improvements since the pandemic through measures such as renegotiating aircraft leases at favorable terms, thereby reducing costs and increasing its net income margin. “Higher willingness to spend on travel by consumers, paired with constrained capacity and high inflation, have left full-service carriers better positioned relative to their low-cost carrier competitors,” Spiess said. “LTM has emerged bigger and leaner from the pandemic, and we expect the company to sustain improved profitability and post strong earnings growth as they continue to increase and modernize their fleet.” Meanwhile, the analyst noted that Latam Airlines offers “unparalleled connectivity” as the largest full service carrier in South America, which is still somewhat under-penetrated. The airline offers 66 exclusive routes and 143 that they service alongside one single competitor. These routes, where Latam Airlines has a market monopoly, are likely among the company’s most profitable. Spiess added that while profitability levels are not sustainable, Latam Airlines may be the exception to the rule. “We believe that LTM’s profitability will remain above average for longer due to several reasons we highlight below (i.e. low cost profile underpinned by modern efficient fleet and leases negotiated at favorable terms, beneficial mix dynamics, and price premiums vs. competitors),” the analyst wrote.