If you believe the government is coming to bail out American Airlines (NASDAQ:AAL), now is a great day to buy it.
At its March 23 opening price of $11 per share, American is worth just $4.3 billion. It had revenue of over $45 billion last year, and net income of almost $1.7 billion. At the end of the year it also had about $3.8 billion in cash, and it recently secured a loan for $1 billion more.
Of course, American Airlines is practically out of business right now. Assuming it costs $50 million per day to keep the doors open, it would run out of cash around June 1.
That’s why the stock is down 64% year-to-date, and why ratings agency Fitch has cut its debt rating from BB- to B+.
Helicopter Money Coming?
CEO Doug Parker told listeners at a JPMorgan Chase (NYSE:JPM) conference on March 10 that American was “ready for this” and predicted it will emerge stronger from the crisis.
Since then American Airlines has canceled 55,000 flights for April alone, parking 450 planes, and canceling almost all international flights through May 6. The company is trying cargo-only flights.
It offered employees early retirement, but flight attendants are complaining that pilots got a better deal. A baggage handler at DFW Airport has also tested positive for the virus.
Like other carriers, American wants part of a $50 billion proposed industry bailout. Half would come in loans, half in free money, and it could get back $4 billion in taxes previously paid.
Congressional action may be slow, however, because airlines gave away 96% of their cash flow during the last decade, in the form of dividends and stock buybacks.
Buybacks are in particularly bad odor right now because they keep a stock’s price artificially high. They enable huge bonuses to management. And they waste capital that can be used to improve service, pay down debt or just stay on the books for times like this.
Critics complain that American Airlines did $12 billion in such buybacks when times were good, but now wants taxpayer money when times are bad.
Buy the Bonds?
Some relief is coming. The Federal Reserve on March 23 announced new measures to support corporate debt, including new loan facilities and liquidity for the corporate bond market.
American Airlines managed to sell $500 million in new notes Feb. 25, just before the crisis became obvious, at 3.75%. The bonds were sold at par to pay for pension obligations. Within a week they were selling at 87 cents. The problem is that they’re not really trading at that price. If funds that bought the bonds wrote down their value, as they should, they could be shut down when investors try to get out.
These are the kinds of bonds the Federal Reserve is backstopping. If you bought some at 87 cents, before the latest announcement, you have a very fat profit, given that the government is only paying 1% on 30-year money.
The Bottom Line on AAL Stock
As of March 23, AAL stock was still sporting a 3.9% yield on a dividend of 10 cents per quarter.
Forget that. It’s not coming.
Instead, consider buying AAL stock as a speculation. A bailout won’t get you all the way back to $30, the stock’s price a month ago. But it could get you halfway there. You could easily double your money if Republicans can force Democrats to swallow an airline bailout.
Those negotiations are ongoing, despite a failed vote to proceed in the Senate. The present bill includes $500 billion the Treasury has full discretion to distribute.
Passage of the bill, or something like it, would give you a quick profit. My guess is something will pass, and your speculation on AAL stock will pay off.
But that’s just a guess.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM.
