With the coronavirus outbreak on consumers’ minds, now may be the time to sell airline stocks.
Investors fear the Chinese health crisis will impact travel demand — not just in Asia, but worldwide. However, this recent headwind isn’t the only reason why the space could go lower.
Further delays in ungrounding the Boeing (NYSE:BA) 737 Max could impact carriers using the aircraft in their fleets. Boeing may be compensating the airlines for their losses, but it may not be enough to counter hits to profitability.
And, these aren’t the only negative factors. Add in long-term issues like debt, capital expenditures and operational headwinds. In short, plenty of reasons to be bearish on the space, but which ones in particular are hard sells in this market?
Taking a look at large-cap airline stocks, these three names stand out. Different factors are in play for each stock. Yet, as the market may not be done pricing in their respective headwinds, we could see further downside from here.
With this in mind, let’s dive in and see why these are your airline stocks to sell this week.
Airline Stocks to Sell: American Airlines (AAL)
Valuation-wise, American Airlines (NASDAQ:AAL) stock looks cheap. Shares trade for a forward price-earnings (P/E) ratio of around 4.8. Compare that to Delta Airlines (NYSE:DAL), which goes for 7.7 times forward earnings, or Southwest Airlines (NYSE:LUV) — which trades around 12 times forward earnings.
But, diving into American’s financials, shares do not look like such a bargain. Compared to its peers, AAL stock is much more leveraged. With high levels of debt, and a management focus on buybacks rather than debt repayment, American Airlines could have a tough time riding out the next economic downturn.
Additionally, it remains to be seen how the coronavirus will impact AAL stock. But in an industry vulnerable to outside “black swan” events, it’s tough to justify a buy. American Airlines stock may be down from the $50 price level in 2018 to around its current price of $27.47 per share. However, if headwinds accelerate, we could see more downside from here for this member of the airline stocks bunch.
Southwest Airlines (LUV)
Southwest Airlines stock: a sell? This may be a surprise, given the company’s relative strength in such a cyclical industry. In contrast to other airline stocks — largely legacy carriers — Southwest Airlines has a clean balance sheet. Its long-time hedging of fuel costs is another positive. Yet, while Southwest may have a leg up in some respects, the main issue with shares today is valuation.
As mentioned above, LUV stock trades for around 12 times forward earnings. The company’s key advantages justify a higher valuation, but investors could be too optimistic. Southwest has been impacted by the 737 Max crisis, and as a result, income in the fourth quarter of 2019 fell 21.4%. Boeing has agreed to compensate Southwest for the disruption, but 2020 results could be severely impacted.
With this factor in mind, it may be time to sell LUV stock. Shares have tread water for the past year, but we could see downside in 2020 depending on how the 737 Max crisis plays out.
United Airlines (UAL)
It’s no surprise this legacy carrier also makes the list. On an enterprise value (EV)/EBITDA basis, United Airlines (NASDAQ:UAL) stock looks like a bargain. United Airlines stock sells at a EV/EBITDA ratio of 5.1, lower than legacy peer American Airlines at 6.9, and on par with Delta’s EBITDA multiple of 5.7.
But make no mistake; there’s good reason why investors have given UAL stock such a low multiple. The company’s history of deferring capital expenditures is catching up with them. CapEx is projected to soar from $5 billion in 2019 to $7 billion in 2020, impacting free cash flow.
However, a trending red flag for United Airlines stock? Stifel analyst Joseph DeNardi mentioned United as a carrier with high exposure to Asia. So, there’s one stock to sell due to the coronavirus outbreak, it’s UAL stock.
Shares have started to trade lower due to coronavirus risks. On Jan. 17, UAL stock was trading just under $90 per share. As of Jan. 29, though, shares are sitting around $76.50 per share at the moment.
Therefore, if the coronavirus crisis accelerates, expect further downside for UAL and other airline stocks.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.