Don't ask me why so many people hold airline stocks. Of course there is money to be made in trading, but I am not a trader. And yes, historically Southwest Airlines (NYSE: LUV) has been a good long term hold, but it is still a lousy business. Southwest reported higher profits beating analysts estimates (who cares) by a penny. The stock is still trading down 30 cents as I write to $14.26 from yesterday's close of $14.56.
I do not see them sharing the LUV with its paltry dividend, equally poor ROE of 7.6 and too much debt. Airlines are capital intensive and highly regulated. They are very susceptible to the weather, politics, fuel prices, war and terrorism threats, strikes and competition.
Continental Airlines (NYSE: CAL) reported a 2% increase in profits today and its stock is down too. So what if airlines are reporting increased profits, they all suffer from the same problems and if they manage to squeeze a little profit out of the company lately, it's because they are coming off such lows that the comparisons should be easy to beat. Also there are so many complexities to the airline business that the financial statements are works of art understood by only those with an intimate working knowledge of the business. Continental pays no dividend and has mammoth 5 to 1 debt: LT Debt-to-Common Equity (LFY) = 501.79.
I have to confess that I would be interested in a stock with a P/S ratio of .35 but looking at low profit margins of 2.61% against its high debt, it's hard for me to spend to much time thinking about this company when so many better opportunities are to be found. Other investors must share my sentiment because the stock is down over 3% from yesterday's close of $36.23 even though profits are up.
Finally something in the airlines world that makes sense to me: American Airlines parent AMR Corp (NYSE: AMR) is considering selling off assets to clean up its balance sheet. Now this is a great idea. Here is my plan. Sell off all the assets you can, take the rest of the divisions and create tracking stocks making AMR a true holding company like Berkshire Hathaway and then start wheeling and dealing to drop the bottom performers in favor of better ones. Even better yet, start offering services to the other airlines, sharing expertise but eliminating all capital intensive, highly leveraged enterprises -- just process expertise and cash and let other silly companies maintain aircraft, fight with the government and pamper customers.
To find potential opportunities and verify my track record, read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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Reader Comments (Page 1 of 1)
10-18-2007 @ 5:38PM
King Kang said...
I agree with the author, the airline industry is subject to so many more irregularities that it is difficult to know exactly when they will up. Still, a profit is a profit. Financially, this is the healthiest most airlines have been since 9-11. Management restructuring and experience are finally paying off.