Airlines — The Most Crucial Question: Will They Survive?
*All assumptions go out the window if domestic flights get banned.
**Update — The U.S. to Take Stakes in Airlines in Exchange for Grants (WSJ)
It seems they are safe for now. But if demand doesn’t pick up in the second half of the year, some airlines may have to restructure, according to a J.P. Morgan analyst.
I’m no debt expert, but two measures give us a quick look at the fiscal health of any company.
Debt/Equity Ratio-Shows how much debt a company is using to operate its business relative to its equity. It’s calculated by taking a company’s short-term debt + long-term debt + other fixed payments divided by shareholder equity.
The higher the ratio, the more debt a company uses to operate its business. Airlines have a higher-than-average debt/equity ratio because it’s a capital intensive business.
EBIT/Interest Expense-Measures how much a company is earning (EBIT) over its interest payments. A ratio of seven means a company is making seven times its interest expense. The higher the number, the better.
*American Airlines ($AAL) is not included because it has a negative debt-to-equity ratio.
**Data from Investopedia. Table from SAM.
If you want to dig deeper…
You can look at a company’s debt obligations and liquidity profile in its annual report.
Page 87 of American Airlines ($AAL) 2019 10-k lists its long-term debt obligations.
To find this information for any company, go to the table of contents in a company’s 10-k and see the Consolidated Financial Statements and Supplementary Data section👇
What’s their chart telling us?
Even before the coronavirus, the uptrend was losing steam. As evidenced by the stock failing to make higher, highs. (orange arrows)
Supply and Demand:
Demand showed up near the $30 level.
If $30 holds, look for a rotation back towards the $45 level — a 50% gain from $30.
If $30 breaks, look out below.
Our view: We’re watching the $30 level closely. We think there’s a good chance it will be retested. Once there, we’ll see if buyers show up again. Out of all the airline stocks, we like Southwest the best.
American Airlines ($AAL)
Since its January 2018 high of $59.08, the stock has fallen 83%.
Supply and Demand:
Found demand at a previous breakout level near $12.
Its chart is a mess and firmly in a downtrend.
If $12 holds, look for a rotation back towards $24 — a 100% gain from $12.
Our view: ❌STAY AWAY❌ There might be a hair ripping rally at some point. But we think to buy a highly leveraged, capital intensive business, whose stock is in a downtrend, a very bad idea.
All other airline charts look similar to American’s — bad. Southwest seems to be the best of the bunch. And its chart confirms it.
We view airlines as a tradeable category (1-3 year time frame). Not as a long-term investment.
But for now, we’ll watch and report back if exciting opportunities emerge.
Don’t want to bet on a single name? There’s an ETF that tracks global airline companies — $JETS.
$JETS has traded sideways, between $27.50 & $35, since 2017. Since February, the ETF has fallen by 50%.
Supply and demand:
No precise supply and demand levels have emerged.
If $12 holds the downside, look for a move towards $20, its previous all-time low before the coronavirus fallout — a 67% gain from $12.
Our view: $JETS is the best way to trade this space if you don’t want to bet on a single name. We are waiting for more clues as to which direction this ETF wants to go.
Foreign ETFs — South Korea & Russia
South Korea ($EWY)
$EWY has traded sideways, between $40 & $75, since 2005. Since making an all-time high in January 2018, it’s fallen 52%, peak to trough.
Supply and demand:
Demand held at $40. Now, we're looking for a rotation back towards $65 — a 62.5% gain from $40.
As long as $40 holds, we think we’ll eventually retest the all-time high near $80.
If price gets below $40, we'll reassess.
Our view: If $40 holds the downside, we're looking for a new all-time high in three years.
If we hit $80 in three years, that’s a 100% gain from $40. Yay! But what if it takes five or even ten years to hit $80?
In that case, a potentially great trade becomes average.
To help us judge opportunities, calculating the CAGR (compound annual growth rate) is helpful.
CAGR smooths the annual growth rate of volatile investments like stocks.
But remember, CAGR is just an estimate. The inputs are guesses. Use it as a guide, not a set-in-stone truth. Just because we set an upside target, doesn’t mean the stock will get there.
Back to the South Korean ETF ($EWY)
**CAGR Inputs — Beginning value: $40 | Ending value: $80 | Percent gain: 100% | Holding periods: 3, 5, and 10 years.
Three-year CAGR — 25.99%
Five-year CAGR —14.87%
Ten-year CAGR — 7.18%
Russia ETF ($RSX)
Since putting in a five-year high at $26.57, $RSX fell 50%, peak to trough — over a three-month period.
Also, since 2016, $RSX has put in a series of higher, highs. (orange arrows)
Supply and demand:
Since 2008, the $12.50(ish) level has held the downside.
If $12.50 holds on a retest, we're looking for a rotation back towards the January 20th high at $26.57 — a 114% gain from $12.50.
If $12.50 breaks, look out below.
Our view: Until $12.50 breaks, it's a good bet to buy at that level, stopping out below $10.
If the current pattern of higher, highs holds, we’re looking for a new all-time high within 3-5 years.
**CAGR Inputs — Beginning value: $12.50 | Ending value: $26.57 | Percent gain: 113.74% | Holding periods: 3, 5, and 10 years.
Three-year CAGR — 28.58%
Five-year CAGR —16.28%
Ten-year CAGR — 7.83%
Thanks for reading. If you have thoughts, I’d like to hear them. Comments are open to everyone.
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Nothing in this article should be considered investment advice. It’s for information purposes only. Don’t be lazy. Do your own research😉