|Airline Stocks May Be Hitting an Air Pocket -- Barrons.com|
|Dow Jones Newswires April 13, 2021 11:12:00 AM ET |
Airline stocks may be hitting an air pocket.
American Airlines Group (ticker: AAL) issued preliminary first-quarter results on Tuesday morning that missed Wall Street forecasts, a day after United Airlines Holdings (UAL) issued tepid guidance for its first-quarter results.
American said in a filing that it expects revenue to be down 62% versus the first quarter of 2019, in the middle of its prior guidance of a 60%-65% decline. The carrier said it expects to post an adjusted loss of $4.29 to $4.41 a share, versus consensus estimates of a loss of $3.93.
On the brighter side, American said its daily operating losses in the quarter would be $27 million, down from a prior estimate of $30 million. The carrier said it would have turned cash-flow positive in March if not for debt and severance payments.
The company is expected to report first-quarter results on April 22.
The results look "worse than expected," wrote Citigroup analyst Stephen Trent, who maintained a Sell rating on the stock and a $21 price target.
Shares of American were down 2.8% in recent trading to around $22. The NYSE Arca Airline Index was off 1.7%. The U.S. Global Jets exchange-traded fund (JETS) was down 1.2%.
The sector could also be under pressure due to fears that Covid-19 vaccination rollouts might be slowing. That's becoming more likely now that health concerns have emerged about Johnson & Johnson's (JNJ) shot, adding to delays in output. Health officials are also warning of sharp increases in new Covid cases in some parts of the country, which appear unrelated to vaccination levels.
The warnings from American and United may be a sign that investors need to temper their expectations for more gains in the stocks. The NYSE Arca Airline index has rallied 25% this year and is up 75% in the last six months, pushing many of the stocks to their prepandemic highs and sending multiples up sharply.
While carriers have plenty of cash and liquidity to survive another downturn, many have strained their balance sheets and issued more equity to raise capital, pushing out an eventual recovery in earnings per share.
None illustrate that more than American. Its fully diluted share count hit 572,000 at the end of 2020, up 31% from the end of 2019. The airline now has an estimated $33.5 billion in net debt, up from $24 billion in 2019.
Yet while revenue is rebounding, it isn't expected to get back to prepandemic levels until 2024, according to consensus estimates. And meaningful profits aren't expected until 2023, when American is forecast to earn $2.39 a share.
Nonetheless, betting against American's stock on valuation concerns or fundamentals hasn't been a winning strategy. The stock has beaten the sector average with a 78% return over the past six months, and it has nearly doubled the sector's return in the past three months, gaining 40% versus 24% for the index.
Some analysts argue that other stocks look better positioned heading into the quarter, though.
UBS'sMyles Walton wrote on Tuesday that he's recommending shares of Alaska Air Group (ALK) as his top pick in the run-up to earnings. The company is making progress toward cash profitability, he notes, and may have more upside in filling available seats than other carriers.
Raymond James' Savanthi Syth reiterated a Strong Buy on shares of Allegiant Travel (ALGT) and raised her target to $290 on Monday. The company is in a "unique position" to generate higher profitability in 2022 than in 2019 due to strong demand trends in its core leisure market, she argues. Allegiant also made it through pandemic without diluting shareholders or stressing its balance sheet, which looks quite strong, she adds.
Alaska Air shares were down 2.5%, at $69.55, in recent trading. Allegiant shares were down 2.3%, at $243.64.
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