American, Delta, United Are Downgraded on International Weakness

NEW YORK (TheStreet) -- A veteran airline analyst lowered his ratings on shares of American , Delta and United , citing the outlook for continuing weak international sales. Deutsche Bank analyst Mike Linenberg lowered ratings on the big three to hold from buy. In a report issued Wednesday morning, he wrote, "We think that international sales will be a source of earnings disappointments for the next few quarters (due to) a strong U.S. dollar, greater-than-expected capacity increases by non-U.S. airlines and decelerating global GDP growth."Linenberg said the combination of factors likely will further pressure international passenger revenue per available seat mile beyond his forecast projection of negative 5% during 2015. On the bright side, he said, "We do believe that airlines will be quick to utilize their sizable share repurchase authorizations in response to any stock price weakness. The net effect, in our view, is that American, Delta and United shares will be range-bound in the near-term, hence, our hold rating." Beyond 12 months, Linenberg said his "positive long-term investment thesis remains intact." That is to say that "the U.S. airline industry has become an investable sector with significant free cash flow and run by management who are pro-shareholder. Furthermore, the U.S. airline industry is on track to produce record profits and free cash flow this year -- that has not changed. The only difference is that the profits/free cash flow won't be as much as we had originally projected. " Shortly after the opening bell, American shares were down $2.12 to $50.60. Delta was down $1.18 to $43.78. United was down $1.90 to $65.35.Airline shares have excelled over the past three years. In 2014, for instance, the top S&P 500 performer was Southwest , which gained 125%. American, meanwhile, gained 113%; it joined the S&P this month. Linenberg said the move represented "market endorsement" of his long-term thesis.Must Read: American Air Shares Rally After They Join the S&P -- Is United Next? But this year has not been a good one for airlines, which now trade more in response to oil price fluctuations rather than to the consolidation and restructuring of the industry. Year to date, including early trading on Wednesday, American shares are down 5%, Delta is down 11% and United is down 2%. "It has become apparent from our client meetings over the past several months that potential new investors are less enamored with the Big Three carriers today than six months ago," Linenberg said. "While valuations are very attractive (i.e. 10x fully-taxed 2015 EPS), PRASM pressures, fuel price volatility, peaking margins, and systematic risk are keeping new money on the sidelines. "Furthermore, the sector's significant share price outperformance over the past three years has made it more difficult to justify initiating positions at current levels," he said. Linenberg maintains buy ratings on domestically focused carriers led by Southwest and JetBlue . But he noted that fuel price volatility remains a key risk for the airline industry.Must Read: American/US Airways Shares, Up 1000% in 3 Years, Take a Break

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