<p>What’s up with American Airlines (NASDAQ: AAL)? Down more than 50% in a month, stocks can be a good controversial buy. Especially if the economic fallout from coronavirus from China turns out to be less dangerous than predicted.
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Nevertheless, the outbreak only increased to the airline’s existing problems. Borrowing money to finance repurchases, the airline played it fast and loose.
It worked while the economy shot at all the cylinders. But with air travel effectively stopped and the company bleeding cash, it’s hard to see this story end in anything but tears for investors.
However, there is light at the end of the tunnel. A rescue operation from the aviation industry can prevent bankruptcy. But with high uncertainty and minimal upside, it is difficult to find a compelling reason to buy AAL shares at today’s price levels, about $ 15 per share.
So you should go short in American Airlines? Or are you waiting for a more promising starting point and laying down your chips? Let’s dive in and catch them for this deadly airline.
AAL bearings and COVID-19
Coronavirus from China (COVID-19) could send many companies to Chapter 11. This includes restaurants, retailers, casinos, cruise lines and airlines. A capital-intensive industry with high leverage and airlines are poorly equipped to handle black swan events like this outbreak.
The behavior of the aviation industry does not give them much sympathy either. Customers embitter the industry’s nickel-and-dime tactics to maximize profits. And another major industrial trend has brought challenges for them, when they come to Washington, hat in hand, for a rescue.
What I’m talking about is the repurchase of shares. As InvestorPlace’s Bret Kenwell discussed on March 24, almost the entire industry’s free cash flow has gone back to repurchase in recent years. American Airlines is no exception. As this Seeking Alpha contributor recently wrote, the airline extended itself to borrow money to buy back shares. It is up to debate whether it is right or wrong to save companies that spent their safety net on repurchases. But with the US Senate adopting a stimulus bill, a bailout for the airline is on the table.
Still, is federal intervention just as big for AAL shares? The bill includes $ 25 billion in loans and loan guarantees for passenger airlines. Still, American Airlines alone has $ 24.3 billion in loans and financial leases. In other words, it may not be enough to support the entire industry.
This bill can ensure that the airline does not go bankrupt. But that does not mean that equities will not fall anymore, if the profitability continues and the company has to borrow more due to cash outflows, further disadvantage seems more likely.
Stimulus may not be enough to send stocks higher
In recent days, the AAL share has recovered from its 52-week low of around $ 10 per share, up to over $ 15 per share. An approved stimulus package can increase further. But there are several factors to consider. First, if the airline accepts some of the loans / loan guarantees offered through the bill, they would not be able to pay dividends or buy back shares for one year after the loans are repaid.
But more importantly, does this bill change the current environment for American Airlines? According to the New York Times, with coronavirus stopping travel, only a handful of passengers ride the airline’s typically busy routes, such as New York to Los Angeles. And with most of their international routes grounded, they have some money coming in at the checkout.
Until things become normal, it is difficult to predict upward potential in the AAL share. All games are suspended regardless of whether “normal” occurs a few weeks ahead or a few months ahead. So, with this uncertainty, how do we handicap this stock?
That’s the question. It is difficult to put a number on how much coronavirus will put back American Airlines. There is no guarantee that the airline’s volume will return to 100% immediately. What happens if their passenger volume only goes back to, say, 80% of where it was?
Too late to short, too early to buy AAL stock
The opportunity to short AAL shares has come and gone. Investors were wise enough to sell cards because the outbreak first made headlines back in January, realizing huge profits. But investors trying to ride down to zero today may get more than they negotiated for. To short this name, if the end of coronavirus locking is around the corner, it can lead to an epic pressure.
Still, we can be far from the bottom. The shares have recovered in recent days as the stimulus bill develops in Congress. But this could be a dead cat bouncing afterwards. With the risk it takes years for the airline to get back to where it was, buying for $ 15 to rally back to $ 30 looks like a bad proposition.
Thomas Niel, contributor to InvestorPlace, has been writing a one-share analysis for web-based publications since 2016. At the time of writing, Thomas Niel had no position in any of the above-mentioned securities.