The U.S. airline sector, to say the least, has not offered investors any excitement lately. The flat-to-declining number of travelers, intense competition, and yet another battle with sky-high fuel prices in 2008 have created an environment that's ripe for further industry consolidation, and sluggish share price gains.
Even so, selected entry points are possible, for high-risk investors only. AMR Corporation (NYSE: AMR), parent company of American Airlines, is one. Here's why:
Although traffic is expected to continue to tumble through FY2009, AMR has done a good job cutting capacity by 7%. Further, fuel costs have likely peaked for the year, and are projected to decline 20-30% this year.
AMR also has key hubs in Dallas/Ft. Worth, Chicago, Miami, St. Louis, and San Juan, Puerto Rico. Hence, it's well positioned in a key domestic growth zone (Dallas) and internationally (Latin America). In short, AMR will be one of the airline sector's survivors of this pronounced recession. The First Call FY2009/FY2010 EPS estimates for AMR are a loss of -$2.25 to a profit of 86 cents.
Further, Wall Street has already priced the sector's sluggishness into AMR's shares: AMR's shares are now about as cheap as an empty shoe box. And as the legendary founder and owner of the New York Giants, the late Tim Mara, once said, 'Even an empty shoebox is worth $500.'
Stock Analysis: AMR Corp. is a high-risk stock. Consider buying a 25% position in AMR now; then buy another 25% in four months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your AMR position before October 2009. Sell/Stop Loss if you were to buy shares in this company: $1.50.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
Disclosure: Lazzaro owns frequent flier miles with American Airlines (NYSE: AMR) and with Air France.
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