The rapidly accelerating rate of infections in the several U.S. states put a quick end to the rally in airline stocks. United Airlines (NASDAQ:UAL) peaked at $50 in early June 2020. But from there, United Airlines stock failed to find bulls.
Now that United Airlines stock is near $35, investors willing to bet on the beaten-down sector need two things.
First, UAL needs an accelerating pace of airline traffic growth. Second, the airline needs to boost its liquidity and accumulate debt as coronavirus cases hurt demand.
Bankruptcy Risk Averted for United Airlines Stock
Strong demand for United Airlines’ debt should remove any near-term bankruptcy risks. The company increased the size of its offering to $6.8 billion, up from $5 billion. At a generous yield of 7% to 7.25%, investors are clamoring over the offering because cash earns zero interest.
UAL’s lower interest rates suggest that the market is more confident in this airline’s prospects. For example, United has $23.43 billion in debt (before the offering), compared to American Airlines’ $34.07 billion. Here are the total debt airlines carry:
|Ticker||Company||Cash||Total debt (in billions)|
|AAL||American Airlines Group||3,576||$34.073|
|ALK||Alaska Air Group||2,125||$3.903|
|DAL||Delta Air Lines||5,967||$22.971|
In addition to the U.S. aviation unions asking Congress for another $32 billion “to keep hundreds of thousands of workers employed,” CEOs will meet with the Vice President Mike Pence and other senior officials in the White House.
The companies will need to abide by federally mandated rules that will reduce the risk of spreading the coronavirus. This includes mandatory temperature checks for passengers and contact tracing of passengers.
The U.S. cannot do anything to stop the European Union from restricting U.S. travelers from entering its borders. Until the U.S. reduces infection rates in such places as Texas, Alabama, Missouri and Nevada, travelers cannot go to countries in the EU.
Delays in re-opening Disney (NYSE:DIS) theme parks in California and Florida are another negative indicator for passenger traffic growth. Still, daily Transportation Security Administration checkpoint travel numbers indicated a steady increase. On June 25, total travelers topped 623,000. Disney stock topped at nearly $130 followed with a downtrend to $109.10. And with its park closed, people who intended to visit Disneyworld will also delay their travel from state to state for now.
Double Bottom at $20
Investors who look at charts as a guide will notice that UAL shares double-bottomed at around $20 in March and in May. Increasing coronavirus cases in the U.S. will inevitably lead to higher death rates. It takes over two weeks for infected individuals to show a worsening condition if they have pre-existing conditions. These figures may force the government to re-impose flight restrictions, hurting passenger traffic.
UAL trades at a price-book ratio of below 0.9. But its debt-equity ratio of 1.88 may increase again. By comparison, Delta Air Lines (NYSE:DAL) trades at a price-book of 1.2 and a debt-equity of 1.19.
Investors who take a long-term view may apply the following metrics in a 10-year discounted cash flow model: revenue exit.
|Discount Rate||8% – 7%||7.5%|
|Terminal Revenue Multiple||0.7x – 1.7x||1.2x|
Model courtesy of finbox
Despite the model implying a fair value of ~$36, the stock may keep falling to the $20 level. Still, the negative sentiment will reverse as flight demand improves.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.