Airlines: Time to Unleash ‘Cash Flow Hell’
By Ben Levisohn
Wolfe Research’s Hunter Keay and team contend airlines stocks–including American Airlines (AAL), Delta Air Lines (DAL) and United Continental (UAL)–will either get a boost from better passenger revenue metrics or increased share buybacks. They explain why:
We believe investors don’t really care about share buybacks… yet. And that’s totally understandable given the buybacks we’ve seen so far and the recent announcements have been generally modest in size. And even the big announcements are being perceived as unsustainable as they’re being funded partly by fuel. We see the rest of 2H15 following one of two likely paths: oil prices go up and [passenger revenue per available seat mile, or PRASM,] gets better, or oil prices stay low, PRASM stays bad (but gets less worse), and cash flow and margins are sustained. We’re ok with either one. We believe we’re on the precipice of a period of cash flow hell being unleashed by airlines, mainly American Airlines, Delta, and United Continental but also Alaska Air (ALK) and maybe Southwest Airlines (LUV), on their own share counts via ramped up buybacks. We think most C- level airline executives aren’t losing a ton of sleep these days if investors want to trade their stocks at deeply discounted multiples during periods of record earnings, because it simply allows airlines to buy what they believe are solid long term stories at a sale price. And we get that, and we think most investors get that, too.
Here’s a secret: PRASM doesn’t have to get better for airline stocks to work. It just has to beat expectations. We believe airline stocks have performed poorly this year because nearly all airlines except Spirit Airlines (SAVE) told investors late last year that fares would not come down as fuel came down. Most chalked that up to a personal problem for Spirit. Published estimates were too high (ours too, by the way), PRASM bled out slowly over 1H15, //
Covered August 21st 46$ calls today that sold Were Unlikely to expire in the money but took the 88% one week gain and can sell calls again if get pps bounce(finally?) on cheap fuel. Made much more than would have made if increased divvy the 20c I had expected but still not happy that no divvy increase
Agree per regionals other than legacies trading at much lower valuations...good ol US Airways probably would be doing quite well assuming their employees would not have striked due to lower pay scale. LCC would not have had the INTL or Dallas issues AAL is having...
Lowest this year. IMO, 50/50 odds oil drops to 40$ or less before year end. Big question is will aal pps rise or will the market expect intensified capacity/fare pressures ?
By YE if still around 40$ share,ttm pe will be about 4.5 on yahoo finance with eps around 9$, don't see the pe less than the eps too often especially that much less...assuming revenue metrics are starting to improve even marginally the light bulb will go off and aal will rise an likely well before YE..
Hard to see any positive catalysts short term, maybe 40$ oil and/or buybacks will get pps to 45$or so. I am looking to continue seling calls on any bounces. Sold August 21 46$ calls last week for 90c ...
65m only buys back about 1.7m shares. Long term holders love consistent divy increases. It's like getting a raise every year and is a reason to keep holding thru rough periods like now
Better if oil drops on supply/demand vs. strong dollar because strong dollar is why aal has currency related revenue declines in Intl
bears, agree but will be surprised if none downgrade or lower pt, of course most did both awhile ago..upgrades on valuation per buybacks and low fuel
like SP are what should occur imo..
So far no analyst has lowered pt or rating that I am aware of...one upgrade(SP) and one small pt raise(CS)
bears, Kirby cannot know for SURE that will take until 2H 2016 but more importantly before they get to positive prasm in 2H wouldn't you expect prior quarters prasm to improve significantly from the minus 6-8% in 3q ?
This is the problem with his answer, you can infer that prasm will be dowm 6-8% until maybe improving in 2H 2016. Correct me if I'm wrong, but I do not recall anyone saying that prasm would be better in the 4q , 1q, 2q...ie--prasm could be down 6-8% in those quarters. Believe Parker said he didn't know when prasm would turn positive.
CS increased pt to 45$ from 44$. Hey, a bucks a buck and didn't lower it like last couple reports.
"the absence of visibility..."// IMO this is what is a big issue. Even with easier comps and synergies kicking in starting in 3q, no positive prasm expected until maybe 2h 2016. Of course, the larger prasm declines started in 1q so we may see some significant improvement in 1q even if not positive until 2h. As soon as the worm starts to turn so will the stock. Would have better to say "we expect prasm to start to improve BO2016 and turn positive in 2H." Management has been a bit too blunt in some of their answers..not emphasizing the potential positive outcomes enough.
Call Commentary Spooks Investors
■ Estimate Updates: Our '15/'16E rise to $8.73/$6.53 from $8.26/$6.48 on
lower fuel and our TP rises slightly to $45 (note, the boost is on lower fuel).
■ Q2 & Q3 PRASM Not as Bad as Feared…Positives included Q2 results at
the mid-pt of guidance, a Q3 PRASM guide that was in-line to better than
expectations, and an incremental $2B buyback authorization on top of a
$750M repurchase in the quarter (although the latter was known), bringing
the remaining authorization to 10% of the mkt cap with an 18 mths timeline.
■ …But Call Commentary Spooked Investors: Despite any positives and
what seemed like a more bullish tone vs. intra quarter, remarks on the
domestic revenue environment spooked the market. Management
commented that it continues to match "more and more" LCC prices, that
there is "no improvement in domestic market detected" and a "reasonable
expectation is for positive PRASM in the second half of 2016". Further, the
admission that US Airway's Advantage Fares had been expanded to the
entire AA network post-merger also came as a surprise, although the
company asserts this is not a recent change and started last year.
Regardless of when it happened, the message was that that American
would continue its aggressive revenue management strategies and Q3
domestic PRASM would be down similar to Q2's 5% decline.
■ Our View on the Stock: We expect AAL shares may continue to lag on a
relative basis given the ongoing unit revenue underperformance, which
appears to be partially self-inflected with aggressive rev mgmt strategies.
The absence of visibility for a return to positive PRASM growth in the next
12 mths, despite synergies and easier comps makes a bull case more
challenging. The new buyback was unexpected, but as recent mkt reactions
have demonstrated, investors aren't paying for airline buybacks. Concerns
over capacity, pricing and peak margins continue to dominate sentiment.//
Pretty much sums it up, at least didnt drop pt,raised it1$