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 (UAL) 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., (WMT) Home Depot Inc. (HD) and Target Corp. (TGT) 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. (AAL) down 68%, Delta Air Lines Inc. (DAL) down 67% and Southwest Airlines Co. (LUV) down 56%. In comparison, the S&P 500 (.SPX) is off 11%.
The stocks got a prominent vote of no-confidence earlier this month when Warren Buffett said Berkshire Hathaway Inc. (BRK/B) had sold the entirety of its airline holdings. Boeing Co. (BA) 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.”
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