Raging Bull Morgan Stanley Cuts United Continental Estimates, Still Overweight

Morgan Stanley’s John Godyn has been among the most bullish airline analysts on the Street, so it’s worthy that he did something far-from bullish today–he cut his earnings forecast for United Continental (UAL).

Bloomberg

Consider: Shares of airline stocks like United Continental, Delta Air Lines (DAL) and American Airlines (AAL) have been buffeted by three issues recently. They’ve seen oil prices rise, Lufthansa cut its forecast, and what is now viewed as a disappointing May revenue report. And United Continental has the most exposure to all three themes. Godyn explains:

Diving into each risk factor, we still believe UAL can beat 2Q consensus, but the margin by which they beat has rightfully slimmed…

With every 3.5 cents/gal. in jet variance vs. guidance roughly equal to a ~$0.10 move in 2Q EPS, we suspect if the recent fuel shocks continues, fuel pressure may shave $0.05-$0.10 off of our 2Q14 EPS estimate. Accordingly, we've raised our 2Q fuel est. 2 cents for ~$0.075 EPS impact on 2Q…

With UAL's international revenue ~40% of total and roughly half of that coming from transatlantic for total transatlantic revenue exposure of ~18%, even a multi-point swing in UAL's transatlantic PRASM from here would have a total PRASM impact of only 50-100bps on 2Q results. With each 50bps of consolidated PRASM worth roughly 10 cents of 2Q EPS, this could pressure EPS slightly…

Following April's strong A4A System PRASM growth of 6%, May YoY PRASM growth was 5.7%. Assuming that American Airlines recorded May PRASM of 7%, at the high end of its 2Q guidance range and in-line with Delta Air Lines, it's likely that UAL reported YoY PRASM growth of~2-2.5%…

Accordingly, we're adjusting 2Q EPS lower from $2.20 to $2.05 on UAL and plan to revisit 2Q14 EPS estimates for UAL along with the other airlines we cover in our preview report ahead of EPS results. We maintain our 'contrarian value' OW on UAL – after all, it trades at half the market cap of Delta Air Lines despite similar revenue – and our high-on-the-street $8 EPS estimate in 2015.

Shares of United Continental have dropped 1.1% to $43.18 at 2:33 p.m. today, while Delta Air Lines has dropped 1.3% to $39.05 and American Airlines has risen 0.4% to $44.73.