Overall, strong government support has stopped some airlines from going bankrupt. However, the worst is far from over. Although things have been starting to pick back up in travel, it’s no secret that the airline industry is still suffering at the hands of the novel coronavirus pandemic. Transportation Security Administration (TSA) data of daily passenger throughput shows that numbers have decreased after the busy holiday season. And against this backdrop, it’s no surprise that airline stocks are facing downgrades.
In fact, JPMorgan analysts covering U.S. airlines downgraded their ratings to the equivalent of sell on valuation concerns. Deutsche Bank analyst Michael Linenberg also said U.S. airline companies could be in for “the greatest demand recovery since World War II in 2021.” Nevertheless, he argued that airline stocks are fairly valued after a significant recent run-up. “The stocks are at or near fair value based on 2022 valuations (and in some cases, 2023), suggesting to us that investors’ have already paid for two years of earnings growth,” Linenberg wrote.
With all of that in mind, investors are pricing in the recovery before it happens. Hence, several airline stocks in the space will continue to give away ground as we move further into the year. That said, this article outlines three companies that will get cheaper in 2021. And if you have these in your portfolio, it’s the right time to book your profits.
Now, let’s dive in and take a closer look at each one.
Airline Stocks That Will Lose Steam: American Airlines (AAL)
Despite its size, AAL stock is perhaps the hardest hit of all the major airlines. Although the company has reported losses in the last four quarters, it has done all it can to shore up its liquidity and reduce costs.
Collectively, American Airlines is showing progress as it rebounds from the pandemic. However, high cash burn and high debt relative to its peers will make its recovery a long and arduous affair. In the fourth quarter of 2020, the airline reported losses per share of $3.86 per share. That said, it topped analysts’ expectations by 6.1%. Additionally, revenue dropped 64% to $4.03 billion, but beat consensus estimates of $3.88 billion. Load factor also fell to 63.4% from 84.7% but exceeded expectations of 62.9%.
Moreover, the daily cash burn rate came in at $30 million — comparing favorably with approximately $100 million in April. The company said it expects to end the first quarter with $15 billion in total available liquidity. “As we look to the year ahead, 2021 will be a year of recovery,” Chairman and CEO Doug Parker said. “While we don’t know exactly when passenger demand will return, as vaccine distribution takes hold and travel restrictions are lifted, we will be ready.”
Due to the air carrier reporting better-than-expected quarterly results, AAL stock is up more than 12% the past month. But Cowen analyst Helane Becker warned investors that prices were “dislocating from fundamentals.” Out of 12 analysts, there are seven with a “sell” rating and four with a “hold” rating. Also, analysts have a 12-month consensus price target of $14.33 per share, implying a 18.9% downside to the current price.
United Airlines (UAL)
The nation’s four largest airlines, American, Delta (NYSE:DAL), United, and Southwest (NYSE:LUV), had $31.5 billion in cash on their balance sheets at the end of 2020. Despite the worst year in its history, UAL ended 2020 cash-rich. Additionally, American and United recently sent out layoff notices to 27,000 employees between them. However, the airlines said they could again be furloughed unless there is a third round of government assistance before April 1.
So, the company has cash and is conscious of cutting expenses. However, the markets have not responded super well. Shares have a three-month return of just 10.5%. Consequently, the outlook for UAL stock remains muted. With a ton of long-term debt and the inability to issue dividends until 2026, shares present a risky proposition at this stage. In its latest earnings report, United Airlines said it expects to exceed its pre-pandemic EBITDA margins by 2023. But warned sales would continue to suffer as the health crisis wears on.
Furthermore, United swung to a $1.9 billion net loss in the fourth quarter from a $641 million profit in the year-ago period. Fourth-quarter revenue fell 69% to $3.41 billion, below analysts’ estimates of $3.44 billion. The carrier’s full-year net loss of $7.1 billion was the largest since 2005. The airline managed to avoid insolvency and will likely stay afloat. However, by its own admission, the company will struggle to show meaningful performance in the upcoming years. “Aggressively managing the challenges of 2020 depended on our innovation and fast-paced decision making. But, the truth is that Covid-19 has changed United Airlines forever,” the carrier’s CEO Scott Kirby said.
Out of 11 analysts covering the stock, only four have a bullish view on the stock.
JetBlue Airways (JBLU)
We polish off this list with another airline that has had a particularly rough time as of late. JetBlue’s route network is concentrated in the Northeast, especially New York and Boston, which faced the pandemic’s worst. State and local administration enforced strict lockdown restrictions when the virus picked up the pace. And even though several cities have relaxed rules, residents remain squeamish of traveling. That makes for a bleak outlook.
JetBlue executives are optimistic that the airline will make a strong recovery over the next two years. However, the statistics do not bail this out. Last quarter, JetBlue’s revenue fell 67% year over year to $661 million. The company also posted an adjusted net loss of $1.53 per share. And even though it beat expectations by 9.5%, it still wasn’t great news by any stretch. Additionally, JetBlue reported a daily cash burn of $6.7 million during the fourth quarter, a bit better than the initial outlook of between $6 million and $8 million.
Looking ahead, the company’s management doesn’t expect things to get better in the first quarter. In Q4, the airline benefited from holiday demand around Thanksgiving and Christmas. No such relief in the first quarter, as there are no comparable holidays and fuel prices are rising slowly.
Luckily, the airline will receive over $500 million of federal payroll support funds this quarter, including at least $382 million of outright grants. However, air travel demand will take time to rebound. And before that happens, financials will not improve.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.