Using the prospectus from the merger, AAL indicated they expected to earn $4.3 billion in 2015 ... that was with fuel high and some synergies.
If fuel stays at this level for all of 2015, it will be about $1.30/gal lower (times) 4.4 billion gallons per year is $5.7 billion to the bottom line. Add that to $4.3 billion and you get $10 billion in pre-tax earnings. Divided by 735 million shares and you get $13.60 eps for 2015 (times) 8.5 pre-tax PE, and you get a price target of ... $115/share. What do you think ... an easy double? Anyway, makes current price targets look easy.
The prospectus for the merger gave $3.7 billion in pre-tax earnings for 2014, which they are easily going to make. The prospectus also indicated a pre-tax earnings for 2015 of $4.3 billion. If AAL saves 60 cent/gal for the 4.4 billion gallons they use, that makes for 2015 pre-tax earnings of about $9.30/share. Use the analysts' pre-tax multiple of 8.5 and AAL's target is $79 .... fair value for 2015.
It could happen at any moment ... people might go, "hmmm, AAL uses 4.4 billion gallons per year, times the savings/gal in the drop in fuel divide by 740 million shares added to this years eps is .... hmmm ... OMG. And they have synergies yet to added as well ... OMG, OMG.
And it is undervalued now using the old fuel price and no synergies.
Parker at LCC decided not to hedge fuel about 3-4 years ago. LCC was the only airline that didn't hedge and were given grief for it from the analysts. However, during that time LCC usually had a lower fuel cost than hedging airlines.
Parker's argument was that the airlines had a "natural" hedge, in that if fuel went up, all airlines would raise fares to be profitable at a non-hedged fuel price. Hedges do run out and the industry had to show that they were set to make a profit at the raw fuel cost. And that is what happened. Sure, for the quarter or so that fuel spiked, LCC would be hit with rising fuel, but that cost would be swamped by the cost of continually maintaining a hedged position. He was right.
AMR had some hedges left over after the merger which were exited in June when oil was $112. I believe for a number of quarters AAL will be booking a profit on those exited hedges. Hedge accounting has a lot of moving parts, but nothing like selling the hedges when oil was high.
// They could rise more than 40% next year, to $75, and still look reasonably priced. //
I'll take any and all positive articles. In the above quote, at least they said "still look reasonably priced". Using an 8.5 PE, that $75 implies only a 17% drop in fuel for the year. I guess they are thinking oil will average in the $85 range for 2015. Wall Street may still be in denial about the potential ... if they are, Main Street has a ways to go.
If oil averages $70, it is easy to get a $98 price target using an 8.5 PE. (other things being equal)
If oil averages where it is today, you can argue a $113 price target. (other things being equal)
cav ... yes, fuel savings does lag even though not hedged. And I imagine it is not 100% of the drop in fuel that shows up in fuel savings. They have into plane costs that are fixed, so do they save 90%, 95% or %? of the drop in fuel? All carriers have that situation though. Still the savings is going to be huge ... don't want to dismiss that. This fuel savings is going to pay for a lot of the new airplanes ... great for earnings, great for the balance sheet, great for careers, great for shareholders.
// 10.34 per share....! //
That in itself is pretty good. If you work it out using the numbers yesterday from the company it's $12.43 (+/- 51 cents) for 2015.
And that is using forward curve fuel, and current analysts revenue estimates. So, if fuel stays where it currently is, earnings will be higher, and as they fill the empty seats on the higher capacity, new aircraft that will go right to the bottom line.
Actually, the sec filing on Oct 23rd gave a midpoint of $2.59 jet fuel for Q4. They project on the forward curve, and I expect them to do the same in 2015. I agree, the lag is looking more like a month.
I can only guess about LF, but I think they went to a higher gauge, same flights and the demand just has to develop. Excluding the impact of the extra 4% raise, higher gauge is going to keep CASM ex-fuel close to flat in 2015. December didn't have T-day this year as well, and Q4 was going to be more difficult than Q3 regarding Venezuela ... those comps will improve in 2015. I believe the thinking is that the consumer benefit to lower gasoline will take a number of months to show up in the economy.
Bears ... I was just saying what AAL has said about the numbers ... it's not perfect ... just the best way they feel they can report since they weren't combined last year.
I'm trying to sort through the numbers you are talking about ...
If I assume the average revenue number from the analysts (or off of yahoo revenue estimates), and use AAL's cost guidance from October for Q4 (and use the midpoint of costs), they don't make a buck fifty in Q4. Now, I do think they will beat their cost guidance on fuel, so they can hit current estimates ... Still I'd be happy leaving Q4 estimates where they are.
ae .. for one thing, the higher prasm at DAL means that DAL had far fewer flights out of Venezuela for YOY comparison of prasm than AAL. Revenue last year out of VZ was extremely high, making YOY prasm comparisons tough for AAL ... this impact will dissipate.
When the NOL's run out? Does it matter? The stock is being valued at a pre-tax PE ... when the NOL's run out, and they start paying taxes, the multiple used will be 50% higher, around 12-13.
And if corporate tax rates are ever lowered, which I'm not counting on, the multiple would be higher ... airlines fall into the category of stocks that would be helped by a corporate tax rate cut ... and many other stocks.
Oil is just rolling out to the next month, and as it does, every month oil pops a little bit. Happens every month.
Eventually, the pundits will start talking about the change in financialization ... i.e. new rules. But they have been making up explanations for why we had high oil for so long, it's going to be hard for them to say it was due to a different reason. Commodities look to the futures (impacted by deregulated commodity swap derivatives too) for price discovery ... no outsized positions and there is air below. Commodities have been pushed to what the economy could bear (and it couldn't bear it very well). That's monopoly pricing, not supply and demand, and it caused a misallocation of resources that we have to deal with ... along with airline stocks going up:) The Commodity Modernization Act of 2000 was a disaster ... housing, financial freeze, commodities.
I think some of this is in anticipation of rule changes being made final. And I hope they are made final so prices can't be manipulated high again.
Happy T-day to all here ... a lot to be thankful for, and the insights and ideas bounced around on the board have been great ... thanks to all. Good food, drink, with friends and family.
Breath taking drop in energy so far today ... just amazing.
Though there is a currency and supply and demand story for oil, I still think there is something else everyone should keep in the back of their minds. November 17th was the last day for derivative industry associations and large banks to appeal the ruling in favor of the CFTC to implement their new rules impacting commodity derivatives. The suit was filed last December and in May-June the CFTC held further meetings indicating that they were going through with the rules. (all commodities started dropping then). September 17th the court ruled in favor of the CFTC. The rules aren't final yet, but once oil is down, it'll be interesting if commodity prices can be manipulated back up to the extent they were. Regardless, the drop due to currency (the strong dollar) will not be recovered. So, unless the dollar drops a good chunk of the oil drop will stay.
Some of the drop in commodities has to be due to those with outsized commodity positions getting out. And those outsized commodity positions have been identified as being manipulative and exceeding what the new limits will be ... actually there were no limits on the commodity derivatives so all was legal since the Commodity Modernization Act of 2000. Anyway, the CFTC believes there was manipulation, and the financial industry has been fighting the CFTC tooth and nail at every turn ... kind of hard to believe this isn't being talked about more. But who wants to tell the masses that they have been paying through the nose for gas because of manipulation?
And as a corollary to what you said, consumers buying means business picks up and more business traveling ... better business/leisure mix ... means higher PRASM.
// I don't own airlines at near highs when all is rosy. //
That sort of describes the last few years. One always has to re-evaluate.
Not that I know what's going to happen tomorrow, but AAL has gone up 10% over the last 2.5 months and earnings estimates have gone up 50%. And the estimates are "near" what they will make if oil goes back up to $65.
I can see some hedging towards a rise in oil going into the OPEC meeting, but even without the meeting, oil should have some kind of a dead cat bounce at some point anyway.
Also, oil just rolled to the Jan 15 contract, and every month it causes a little blip up at least before it adjusts.
Airline stocks are still undervalued using the old higher oil prices.
Hard to say what is going on. Maybe the bots are just playing with themselves.
One thing, this drop in fuel trumps any revenue weakness, anywhere. A rule of thumb is a dime drop in fuel counters a 1% revenue drop ... got a dime to spare? I think we had many dimes in the recent drop in fuel.
And intl weakness is not new news to the market. And it is not that revenue is that weak with domestic revenue strong.
Just one of those days.