The rollout of the Covid-19 vaccine in the United States and worldwide is giving the airline industry hope. American Airlines Group (NASDAQ:AAL) stock outperformed the major indexes for the first two months of the year.
As the vaccine administration reaches the majority of the population, AAL stock will continue climbing.
Markets may ignore the weak results as the rebound potential from higher airline traffic boosts American Airlines.
Losses Will Not Cool AAL Stock
In the fourth quarter, American Airlines posted GAAP earnings per share loss of $3.81. Revenue plunged by 64.4% year-on-year to $4.03 billion. The $18.36 EPS loss should frighten investors away. Fortunately, the stock market is forward-looking and is pricing recovery in the industry. AAL has several positive developments.
The airline ended the fiscal year with around $14.3 billion in liquidity. This will top $15 billion in the first quarter of this year. This will equip the company with the financial flexibility to continue operating despite losing money.
Should the credit markets seize up, AAL will face no financial distress. In recent weeks, the U.S. Treasury yields rose sharply. This signals a tightening debt market and an eventual rate hike.
AAL raised more than $13 billion in 2020. After issuing debt at lower rates, the airline may focus on building the business post-Covid.
Manageable Costs
Cost actions will increase AAL’s efficiency. Chairman and Chief Executive Officer Doug Parker said that it may take out $1.3 billion in non-operating costs. Though forecasting for 2023 depends on future demand, the lower cost for operations will speed up its return to profitability.
Gallery: 7 Stocks to Buy in Time for Spring Break (InvestorPlace)
Spring has returned. However, so has market volatility. Despite the market jitters, declines we are seeing in many stocks could be a welcome opportunity to pick up solid shares at better prices. Spring typically means growth. In nature, a seed takes planning as well as time to grow. Similarly, those investors who sow the right seeds in their long-term portfolios are likely to see significant returns in later years. Therefore, today’s article introduces seven stocks to buy during your upcoming spring break. 2020 became the year that markets brought rapid returns in a large number of investments. Many market darlings saw returns of 50% or even more, partly leading to euphoria. As a result, valuation levels of most stocks became expensive. Thus, in the case of some short-term selling pressure, investors could soon pick up solid names with better margins of safety. Hope and spring tend to be intertwined. For most of us, this spring might mean healthier days ahead. Given the increased vaccine rollout and warmer weather, many of the restrictions we have faced over the past year might soon be behind us. For investors, the hope that spring brings could possibly mean taking calculated risks to build long-term portfolios. In fact, the earlier an individual plants the “seeds” by investing for later years, the more time there will be to achieve growth through the power of compounding interest.
Occasionally, I mention the Rule of 72, which helps us calculate how quickly an investment doubles with the impact of compounding. We can simply take the number 72 and divide it by the annual return percentage. Let’s say an investment is expected to return 10% per year. So, 72/10 = 7.2. It would take about seven years for the investment to double.
The long-term average return of the S&P 500 index is close to 10% per year. Therefore, if we plan well, we could be hopeful that our savings could potentially double every seven years, if not sooner.
Finally, spring might also mean taking a break from our daily lives and work to go on holiday. Many young people especially associate the months of March and April with traveling to warmer destinations. With that information, here are seven spring break stocks to consider for long-term portfolios:
52-week range: $10.41 – $15.87 1-year change: -5.43% Dividend yield: 2.89% Mexico-based telecommunications group America Movil is our first spring break stock for today. Its services include mobile, fixed-line, wireless, internet and pay television. The company also sells related equipment, gadgets and accessories. Its operations extend well beyond Mexico. It is, in fact, the largest provider of wireless services in Latin America, and one of the largest worldwide. America Movil released Q4 results in early February. Quarterly revenues of 255 billion pesos were down 3.1% year-over-year. However, net profit of 37.3 billion pesos was 79.6% higher than in the year-earlier quarter. Furthermore, the group added 6.8 million wireless subscribers throughout Mexico and the rest of Latin America, twice as many as in Q3. Analysts were also pleased to see that AMOV’s second most important revenue line, i.e., its fixed-broadband services, performed well and expanded 8.4% in the quarter. Management cited, “Going into the fourth quarter the economic recovery already underway appeared to be picking up speed throughout most of our region of operations, with confidence levels shooting up in November following the U.S. presidential election and, shortly thereafter, the announcements of the approval of vaccines meant to ward off the Covid-19 virus.” AMOV stock’s forward price-to-earnings (P/E) and price-to-sales (P/S) ratios are 10.94 and 0.91, respectively. Given the decline in the share price over the past year as well as the historically attractive valuation level, spring might be a good time to invest in America Movil, one of the most important integrated telecoms in the world.
Carnival is the largest cruise operator worldwide. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, Seabourn, P&O Cruises, Cunard Line and Aida, among others. The pandemic has hit travel companies, especially cruise operators, pretty hard. And ships still remain docked for this spring break.
According to the preliminary Q4 2020 figures, Carnival’s net loss was $1.9 billion, compared to net profit of $427 million a year ago. Cash and equivalents were $9.5 billion at the end of the quarter. Unfortunately, management is not able to predict when the fleet might return to normal operations. It expects net loss on both a U.S. GAAP and adjusted basis for the first quarter and full year ending Nov. 30, 2021.
Over the past year, since the pause in operations, Carnival has been removing less efficient ships from its portfolio. It now expects to dispose a total of 19 ships, 15 of which have already been removed. On the other hand, the company recently took delivery of two ships.
So far in 2021, CCL shares have returned over 25%. Recent weeks have seen an improved market sentiment, thanks to the reopening in the travel and leisure space. Yet some investors might soon decide to take money off the table. A potential decline toward the $25 level or below would improve the margin of safety.
California-based Ensign provides post-acute healthcare services stateside. Its offerings include nursing services, physical, occupational and speech therapies and rehabilitative services. Within the skilled nursing facility (SNF) space, the group also operates residential facilities, such as assisted living homes and hospices.
Ensign reported fourth quarter and 2020 fiscal year results on Feb. 3. Q4 revenue was $629 million, an increase of over 12% YoY. Net income was $46.3 million, a 69% YoY increase. Additionally, adjusted diluted earnings per share was 80 cents, an increase of 33% over the prior-year quarter.
“In spite of the continued challenges brought on as the result of the ongoing global pandemic, we are very happy to report another record quarter as we achieved our highest adjusted earnings per share in our history,” said CEO Barry Port.
ENSG stock’s forward P/E and P/S ratios are 23.09 and 1.88, respectively, pointing to an overstretched valuation. Interested investors could regard upcoming dips as an opportunity to buy into the share price. In the coming years, Ensign is likely to become one of the most important SNF providers in the United States. Steady demand for acute care will stay strong. And the company will possibly acquire independent facilities in the highly fragmented SNF space. Thus, the fundamental trend in healthcare services could continue to be your long-term friend with ENSG stock.
ETFMG Travel Tech ETF (AWAY)
52-week range: $11.24 – $34.25 1-year price change: 77% Dividend yield: 0.01% Expense ratio: 0.75%, or $75 on a $10,000 investment annually It wouldn’t be spring break if we didn’t talk about travel. Travel stocks were among the worst-performing shares in the S&P 500 in the early part of 2020. But with vaccine developments, their fortunes have improved significantly. Our next discussion centers around an exchange-traded fund (ETF) in the travel space. The ETFMG Travel Tech ETF invests mainly in tourism and travel firms that rely on technology. AWAY, which tracks the Prime Travel Technology Index, has 28 holdings. The fund started trading in February 2020, days before broader markets, especially travel shares, took a nosedive. However, the comeback has been remarkable. On Feb. 25, the fund hit a record high of $34.25. The top-10 names comprise nearly 50% of net assets of $269 million. Canada-headquartered ride-sharing service Facedrive (OTCMKTS:FDVRF), travel-related information and booking platform TripAdvisor (NASDAQ:TRIP) and Germany-based Trivago (NASDAQ:TRVG) head the list of names on the roster. The run-up in the price of many of the names that comprise the ETF may soon lead to short-term profit-taking. Personally, I’d look to invest for the long term, especially in the case of a decline toward $30 or even below.
Molson Coors Beverage (TAP)
52-week range: $32.11 – $56.10 1-year price change: 10.14% Dividend yield: N/A Just as travel is a major part of spring break for many, so too is alcohol. Golden, Colorado-based Molson Coors Beverage markets a range of beer brands, including Carling, Coors Light, Miller Lite, Molson Canadian and Staropramen, as well as craft and specialty beers. It is one of the largest beer producers worldwide. In addition, TAP has a partnership with the cannabis group Hexo (NYSE:HEXO) Molson Coors reported results for the 2020 fourth quarter and full year on Feb. 11. Net sales decreased 8.3% in constant currency to $2.3 billion. Declines in Europe and Canada due to lockdowns were the main reason behind the fall in revenue. Non-GAAP earnings per share (EPS) was 40 cents, a decline of 60.8% YoY. Additionally, free cash flow was $1.3 billion for the twelve months in 2020. CEO Gavin Hattersley remarked, “We built on the strength of our iconic core and in the second half of 2020, we achieved a record high portion of our U.S. portfolio in above premium products. We expanded beyond the beer aisle and we set the stage to build our emerging growth division into a $1 billion revenue business by 2023.” As economies open up, on-premise sales levels are likely to improve substantially. Forward P/E and P/S ratios stand at 11.68 and 1.04, respectively. Therefore, long-term investors might consider buying the dips.
Headquartered in San Francisco, Volta is the new electric vehicle (EV) charging company planning to merge with the blank check company Tortoise Acquisition II. The deal has recently finalized.
2020 is likely to be remembered for different developments, including the growth of the EV segment. Impressively, Volta has charging stations in over 20 states. In general, EV charging businesses get revenue from charging for the usage of their services. However, Volta is getting increased attention for the difference of its business model. The company’s charging stations have digital advertising screens. It has already made agreements with several retailers, including Albertsons (NYSE:ACI), Regency Centers (NASDAQ:REG), CallawayGolf’s (NYSE:ELY) Topgolf, and Wegmans. Put another way, the company is also a media business, not just a pure EV play. The Street has been excited about this additional revenue stream.
“Volta’s unique business model is poised to capture the vast consumer spending shifts that will accompany our society’s shift from carbon to electric,” said Scott Mercer, founder and CEO of Volta. “With the shift to electric mobility, consumers will expect to fuel where they go. Volta will anchor the infrastructure change, transforming fueling locations away from standalone gas stations to high traffic locations in the community where consumers live, work and play.”
The diversified revenue stream is likely to support the SNPR share price in the coming quarters. Depending on your risk/return profile, you might want to include this young company in your long-term portfolio.
Wells Fargo (WFC)
52-week range: $20.76 – $39.35 1-year price change: 20.94% Dividend yield: 1.05% Next on our list of spring break stocks is WFC. San Francisco, California-based Wells Fargo needs little introduction. It provides retail, commercial and corporate banking and financial services throughout the United States, as well as in other countries. Wells Fargo reported fourth-quarter results on Jan. 15. Total revenue was $17.9 billion, down 10% from $19.9 billion in Q4 2019. Furthermore, net income of $3 billion translated into 64 cents per diluted share. A year ago, the metrics had been $2.9 billion, or 60 cents per diluted share. CEO Charlie Scharf cited, “Although our financial performance improved and we earned $3.0 billion in the fourth quarter, our results continued to be impacted by the unprecedented operating environment and the required work to put our substantial legacy issues behind us. We have clarified our strategic priorities and are exiting certain non-strategic businesses.” In recent years, as a result of the accounting fraud uncovered in 2016, the bank has been restricted by the Fed’s asset cap of $1.95 trillion. Put another way, the bank has not been allowed to grow its balance sheet. However, now the Federal Reserve has accepted management’s plan for restructuring and rebuilding its governance practices. The Street has welcomed this development. WFC stock’s forward P/E and P/S ratios are 15.65 and 2.21, respectively. A potential decline toward the $35 level would improve the margin of safety for retail investors. On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
More From InvestorPlace
8/8 SLIDES
The CEO did not commit to any demand level forecasts in the next two years. Readers may apply the cost cut in a discounted cash flow EBITDA exit model. This uses an EBITDA exit multiple to calculate terminal value after five years.
MetricsRangeConclusion Discount rate 8% – 7% 7.5% Terminal EBITDA multiple 5x – 10x 8x Fair value $5.17 – $41.47 $26.26 Model from finbox
Investors may apply a generous 8x multiple and come up with a very wide fair value. In the most optimistic scenario, AAL posts a strong revenue rebound for the next four years. It may earn an EBITDA as a percentage of revenue in the mid-single digits.
Financial modelers may adjust for a higher earnings percentage after American implements cost-control measures. It will need passenger traffic growing sharply every year to justify a fair value of around $26.
As you can see in the chart, analysts are highly bearish on AAL. The stock has the most “strong sells” that outweigh the “buy” and “hold” calls.
Load Error
Based on its future cash flow, simplywall.st forecasts a $44.34 fair value for AAL shares. Still, this bullish view is clouded by earnings losses. So, the site cannot tabulate a price-earnings or a P/E to growth ratio to compare its valuation to peers.
Opportunity
Chief Financial Officer Derek Kerr broke down the $1.3 billion in cost cuts in two buckets. It will save $500 million from cuts to management. Another $700 million in savings will come from other labor. Other items like facilities consolidations, benefits and fuel efficiencies will add positively to efficiency.
By adjusting for a lower flight volume scenario, American Airlines will survive. Conversely, should demand rise faster than expected in the next three years, AAL may quickly scale up operations.
Capital expenditure requirements over the next two years are minimal. Plus, the government loan will sustain AAL’s liquidity. It only needs to concern itself with the refinancing terms next.
Your Takeaway
AAL is priced to perfection, with more upside to go. Markets are hunting for growth plays and look at the airline as the next turnaround. The vaccine offers strong hope of a work-from-home and stay-at-home order ending everywhere.
When that happens, airline stocks will benefit quickly. After the rally, markets are betting on a bigger-than-expected recovery.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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