Airline Stocks Spike as the Bears Dig In - Barron's

Credit Suisse’s Jose Caiado summed up the prevailing sentiment, writing that American Airlines’ “share price reaction is confounding.”

Photograph by JOHANNES EISELE/AFP via Getty Images

Airline stocks continued to soar on Friday, with some of the most beaten-down ones rallying more than 20%, following huge moves on Thursday.

But analysts expressed skepticism that the big moves reflected anything more than a short squeeze, as investors who had bet against the stocks bought shares to cover their positions.

Shares of American Airlines Group (ticker: AAL) surged a record 41% on Thursday to $16.72 after the carrier announced an upgraded summer flight schedule in which it plans to rebuild domestic capacity to 55% of 2019 levels and international flights to 20%. The stock continued to soar Friday, gaining more than 21% in recent trading. Other heavily shorted airline stocks also rallied, with Spirit Airlines (SAVE) gaining 20% and United Airlines Holdings (UAL) up more than 18%.

Raymond James analyst Savanthi Syth is unimpressed, cutting her rating on American stock to Underperform from Neutral and arguing that shares are now “priced to perfection.”

Credit Suisse’s Jose Caiado summed up the prevailing sentiment, writing that “AAL’s share price reaction is confounding.” While the carrier’s summer schedule announcement was a sign of improving demand, “it certainly wasn’t incrementally positive to the tune of a 41% move in AAL’s share price.” He maintained an Underweight rating on the stock.

Investors shouldn’t lose sight of American’s $40 billion total debt load, including more than $28 billion in long-term debt, and high-single-digit leverage ratio, based on 2021 estimates, “that the company will need to dig out of.” He expects that earnings “will remain negative next year, weighed down by the heavy interest burden.”

J.P. Morgan’s Jamie Baker reiterated his Underperform rating, writing that third-quarter consensus revenue estimates still remain too high. While the airline’s commentary “feels good,” he wrote, “these aren’t the catalysts you’re looking for.” Analysts are now modeling a 64% decline in third-quarter revenue compared with last year, but the decline may be closer to 70% by his math, suggesting that “consensus earnings and liquidity forecasts may actually prove too ambitious.”

One wrinkle that investors may be missing, Baker adds, is that American pledged some of its mileage-program assets to the U.S. Treasury as collateral for $4.8 billion in federally backed loans under the Cares Act. If the Treasury rejects the collateralization, however, “the risk of an American bankruptcy would materially rise, in our view.” The Treasury may demand a chunk of the assets, or none at all. Either way, it’s another layer of uncertainty for the stock.

Citi’s Stephen Trent also reiterated his Sell rating, writing in a note on Thursday that “the lack of business travel puts some downside risk on price point, while ambitious load factor targets could create social distancing concerns.” Load factors refer to the percentage of a flight’s seats with ticketed passengers. American said its load factors improved from 15% in April to 55% in the last week of May (following steep capacity cuts).

If load factors keep rising, passengers may once again be crammed on its flights, raising health-safety concerns. Business travel, meanwhile, isn’t expected to recover as quickly as leisure travel, implying that fare-based revenue may remain depressed.

“These factors, along with the scale of American’s net leverage and pension liabilities relative to expected Ebitda generation, underpin our Sell rating on the shares,” Trent writes, referring to earnings before interest, taxes, depreciation, and amortization. Trent has a $9 price target on the stock.

American was one of the most heavily shorted airline stocks, notes Raymond James’ Syth, and it rallied along with other stocks in a short squeeze. She makes the point that American’s stock price gains now increase the odds that the carrier will issue equity at higher levels, diluting existing shareholders.

“We view AAL as priced close to perfection...which potentially invites an equity issuance to address the highly levered balance sheet,” she writes.

Syth also expects leisure travel to recover before business fares, and she views other airlines as better positioned to capture revenue in the early stages of a recovery, seeing more upside in their stocks. American and Spirit are trading closest to their five-year historical average multiples, she notes, while Alaska Air Group (ALK), Southwest Airlines (LUV), and United “have the greatest upside.”

Write to Daren Fonda at daren.fonda@barrons.com

Let's block ads! (Why?)

Business - Latest - Google News
June 05, 2020 at 11:08PM
https://ift.tt/3gXLGoi

Airline Stocks Spike as the Bears Dig In - Barron's
Business - Latest - Google News
https://ift.tt/2Rx7A4Y


Bagikan Berita Ini