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As the stock market continues to slide , the shares of Delta Air Lines (DAL), United Airlines Holdings(UAL), American Airlines (AAL), and other carriers are starting to look cheap. But are they cheap enough to buy?
That’s the billion dollar question, especially after Southwest Airlines (LUV) told investors that the it estimates its operating revenue will take a $ million to $ million hit during the first quarter of 01575879 “Southwest admitted that the severity of the trend change over last week was alarming, albeit there is a lot of uncertainty if things will get somewhat better or worse,” writes Raymond James analyst Savanthi Syth.
But no airline is identical, and the drops suffer by their stocks have ranged from the merely painful to downright agonizing. During the past month Southwest has declined % Delta Delta has fallen %, JetBlue Airways
- (JBLU) has dropped %, Alaska Air Group
(ALK) has slumped 45%, United Continental has tumbled %, American Airlines has plunged %, and Spirit Airlines (SAVE) has plummeted 200%.
If you’re wondering why some have fallen more than others, it comes down to their balance sheets. American and Spirit, for instance, have about 4 times as much debt as Ebitda, or earnings before interest, taxes, depreciation and amortization, while Southwest has a debt-to-Ebitda ratio of just 0.6. That indicates that the market is starting to worry about potential major disruptions to flights, and the airlines ’ability to deal with it.
These differences, though, are already reflected in valuations. Spirit trades at just 0.8 times book value, according to FactSet while Southwest trades at 2.5 times. United Continental, which has a debt to Ebitda ratio of 2.2, trades at 1.3 times its price to book, splitting the difference. All of them trade well below their five-year averages, and many near the bottom of their five-year ranges,
There’s no doubt that airline stocks are pricing in a lot of bad news . But is it enough? That could depend on whether the U.S. avoids a recession , Citigroup analyst Stephen Trent wrote in a note last week. “[If] This outbreak does meaningfully impact U.S. economic growth and / or is otherwise protracted, then airline stocks and industry earnings are likely to remain under pressure, ”he explains. “On the other hand, if Coronavirus concerns fade in the coming weeks and the U.S. is able to avoid recession, this scenario could see a recovery in ex-Asia demand, which could lead airline stock prices and earnings streams to stabilize. ”
In a note release Wednesday night, Trent maintained Buy ratings on Delta, United and Spirit, a Neutral rating on Southwest and a Sell rating on American.
Write to Ben Levisohn at [email protected]
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