By Karen Langley
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 18, 2020).
Stocks have bounced off their March lows but remain stuck in a
relatively narrow trading range while investors grapple with an
unprecedented lack of visibility on the economic outlook.
Even those interested in jumping back into the stock market to
hunt for bargains face a tall order: How can you value stocks when
it remains unclear how quickly the economy will bounce back and
whether consumer behavior will change when it does? The nearly
completed earnings season offered little clarity because many
companies were unable to forecast what the future holds.
For some of the most-beaten-down stocks, including those of
airlines, the outlook is particularly murky. The carriers have lost
billions of dollars since the coronavirus pandemic brought travel
to a near halt in mid-March. And even once they resume a busier
schedule, many Americans may be reluctant to travel.
"2020 earnings are completely out the window," said Dan Eye,
head of asset allocation and equity research at Roof Advisory
Group, a division of Fort Pitt Capital Group. "I think this year is
really all about survival."
That means investors can't rely on a traditional playbook. Past
earnings don't matter, revenue has plummeted, and there is no
indication when demand will pick up. On United Airlines Holdings
Inc.'s recent conference call, Chief Financial Officer Gerald
Laderman said of earnings per share and margin growth: "Such
metrics simply aren't relevant today."
Investors who just months ago were scrutinizing projections for
growth are now turning to measures of survival, such as cash burn
and debt loads. The same considerations apply to companies in other
industries turned upside- down by the pandemic, from retailers to
energy companies to cruise lines.
This coming week, investors trying to gauge the economic outlook
will get a fresh look at the retail sector as Walmart Inc., Home
Depot Inc. and Target Corp. report quarterly results. The investors
will also parse the minutes of the most recent Federal Reserve
meeting.
In this year's battered stock market, airline shares have been
among the hardest hit, with United down 77%, American Airlines
Group Inc. down 68%, Delta Air Lines Inc. down 67% and Southwest
Airlines Co. down 56%. In comparison, the S&P 500 is off
11%.
The stocks got a prominent vote of no-confidence earlier this
month when Warren Buffett said Berkshire Hathaway Inc. had sold the
entirety of its airline holdings. Boeing Co. Chief Executive David
Calhoun added more fuel to the fire this past week, warning the
airline industry is having an "apocalyptic" moment that could force
a major carrier out of business.
Just a few months ago, airline investors focused on such metrics
as capacity growth and added revenue from charging for seats, along
with fuel and other costs, said Matthew Moulis, portfolio manager
of the Fidelity Select Air Transportation Portfolio and the
Fidelity Select Transportation Portfolio.
Now investors have turned their focus to how quickly companies
are spending cash and how easily they can access more. American has
said it expects to burn through some $70 million in cash a day on
average in the current quarter, while United has estimated its
daily cash burn rate at $40 million to $45 million.
Airlines have also turned to the capital markets -- and a
government rescue deal -- for funding. Among other moves, United
and Southwest unveiled plans for stock offerings, with Southwest
also offering convertible notes, while Delta tapped the bond
market. A $25 billion government stimulus package was designed to
help the airlines meet payroll.
Savanthi Syth, equity research analyst at Raymond James
Financial Inc., recently analyzed airlines' cash levels and undrawn
revolvers, along with estimates for ticket refunds, debt payments
and other costs, such as payroll, lease payments, landing fees and
interest expense.
If demand for air travel doesn't recover and airlines don't
furlough workers, she estimates American would have six months of
cash on hand; United, 10 months; Delta, 11.3 months; and Southwest,
18.7 months. (The calculations don't include loans through the
federal stimulus package.)
"This gives you an idea of, well, how long they can last if
things do not improve," Ms. Syth said.
Investors in the sector are increasingly trying to identify
potential winners and losers.
At Roof Advisory, which has a small position in Delta, Mr. Eye
said he believes Southwest is in a stronger position than its
peers. The discount carrier had $6.3 billion in debt and lease
obligations on its balance sheet as of March 31, while American had
$34 billion. Southwest reported $5.5 billion in cash and short-term
investments, compared with $3.7 billion for American, which also
had $3.2 billion in undrawn credit at that time.
"Southwest looks to be in a pretty good liquidity position and
also carrying really low leverage, even after some of the recent
cash raises and government grants," Mr. Eye said. "On the other
side of the coin would be American. They were highly leveraged even
before the pandemic."
A representative for American pointed to the company's earnings
call last month, when Chief Executive Doug Parker said American's
liquidity position is strong. The company said at that time that it
raised $2 billion in the first quarter in debt and by selling
planes and leasing them back. It also aims to end the current
quarter with about $11 billion in liquidity as it cuts costs.
Investors and analysts are also watching interest obligations
and cash flows. Hunter Keay, senior analyst at Wolfe Research,
questioned whether the carriers can generate enough cash and
earnings to cover the interest on the debt they raised to get
through the crisis, even if demand does recover.
Meanwhile, Delta Chief Executive Ed Bastian said this week that
the airline had refunded more than $1.2 billion to customers since
the pandemic began. Such requests are pressuring cash flows across
the industry. That is a critical metric to watch, said Helane
Becker, senior research analyst at Cowen, because airlines are a
short-term cash business, with most tickets purchased within 90
days of travel. "Cash goes in the door and goes right out," she
said.
Despite the cloudy outlook, Sam Hendel, president and portfolio
manager at Levin Easterly Partners, said his firm is looking for
the right opportunity to invest in airline stocks. But like other
investors, he first wants more visibility.
"The question is: When are people going to start flying again?
It's hard to time that, and getting ahead of it in the stock is
challenging," said Mr. Hendel, whose New York firm has about $4
billion under management. "We'd rather buy them on the upswing than
have to guess a point in time."
Write to Karen Langley at karen.langley@wsj.com
(END) Dow Jones Newswires
May 18, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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