Shares of Delta Airlines (DAL) are down 20 percent to 87 cents per share this morning. Hopefully readers of this blog sold their stock months ago. After JP Morgan’s buy recommendation in May, at $3.30 per share, I pointed out that the stock was pretty much going to be worthless at some point, even though the rationale for JP’s upgrade was their guess that the company would go under in 2006, not 2005.
Now that Delta will join U.S. Airways and United, is anybody next? While not as much of a sure thing as Delta was back in May, I do think Northwest (NWAC) could be the next victim, and have been short NWAC shares in order to try and profit from yet another bankrupt airline.
Profit/Loss Per Vehicle Sold in North America During the First Half of 2005
GM: $1227 Loss
Ford: $139 Loss
Chrysler: $186 Profit
Honda: $1203 Profit
Toyota: $1488 Profit
Nissan: $1826 Profit
It may not be surprising to see those numbers, given what we know about GM and Ford’s union-related pension and benefit liabilities. However, given the employee discounts that U.S. automakers are offering, it is interesting to point out that the Japanese car makers are gaining market share in the U.S. even though they are not the ones purposely sacrificing profit in order to increase sales.
Evidently, consumers are willing to pay more for a higher quality vehicle that holds its value much better than its American counterpart. I know I am.
That table pounding of Delta by JP Morgan back on May 18th looks awfully foolish…
CHICAGO, July 27 – Shares of Delta Air Lines (DAL) sank more than 20 percent on Wednesday after the struggling No. 3 U.S. carrier’s chief executive said the airline’s restructuring plan is not enough to save it. The comments from Chief Executive Gerald Grinstein in an internal memo stoked concern of a possible Chapter 11 filing, sending the stock down more than 20 percent, analysts said. “In light of what we have accomplished together so far, there can be no doubt that Delta’s transformation plan is delivering results,” Grinstein said. “What is also clear is that it is not enough.”
Delta Airlines (DAL) shares are jumping 10% this morning to $3.30 per share on a J.P. Morgan upgrade.
From the newswires:
Delta Air Lines was upgraded to overweight from neutral at J.P. Morgan due primarily to valuation. Analyst Jamie Baker believes Delta may have to declare bankruptcy in 2006, but the shares are pricing in a high probability, about 75%, of the air carrier going bankrupt in 2005. “While the market’s bankruptcy conclusion may ultimately prove accurate, we believe it is one winter season premature,” Baker said. “With equity purgatory not far below current levels, the option value reflected in Delta shares is expected to improve as capital-raising efforts gain momentum.” Baker estimates “equity purgatory” to be at about $1.50.
Recommending a stock that you think will be worthless a year from now is a very interesting call.
As I always do, let’s take a look at this analyst’s track record on Delta shares. Here are prior opinions with closing prices on the day of the recommendation:
03/12/03 Buy $7.48 close
07/20/04 Neutral $5.40 close
10/15/04 Sell $3.42 close
10/26/04 Neutral $4.63 close
05/18/05 Buy $3.35 open
If you’re wondering if you should buy Delta at $3.30 a share today, it’s tough to feel confident with this analyst’s call. After all, Baker wanted you to buy at $7, do nothing at $5, sell at $3, do nothing at $4, and buy at $3.
General Motors (GM) stock is shooting higher by $5 to just under $33 today after Kirk Kerkorian offered to tender 28 million shares at $31 each. Kerkorian’s Tracinda Corp already owns 22 million shares, which it bought recently at $26.33. Tracinda’s one day gain on its nearly 4% stake stands at $110 million as I write this.
This move is really a brilliant one for Kerkorian. He was well aware that hedge fund managers were shorting GM stock for a variety of reasons, including as a way to hedge long positions in GM debt securities. Short covering is explaining most of this move higher. With GM stock higher than $31 on this move, Tracinda would get no takers on its $31 tender offer, and therefore has made a nice profit on no incremental investment.
The reality is that this offer does nothing to change GM’s fundamental outlook. Therefore, one can argue this $5 move in the stock is not totally justified. I don’t own GM stock, but if I did I would be tempted to sell some here at $33 a share.
The ineptitude of the major domestic airlines continues to amaze me. There are some things these companies cannot control; their unions, for example. However, the management teams of United, American, Delta, and US Air are most to blame for extremely poor operations, and as a result, a lack of profitability. In fact, the airline industry since inception has a cumulative net loss. That’s right, they haven’t made a dime.
So, you would think that if there were things you could control as the CEO of a major airline, you would. I am referring to fuel costs. You can hedge fuel costs. You can lock in prices for certain amounts of fuel, deliverable by a certain date in the future. In the world we live in today, you would think the major airlines would have hedged much of their future fuel needs, especially when these companies are losing money hand over fist and United and US Air are in Chapter 11.
Amazingly, American Airlines has hedged only 15% of its fuel costs for the first quarter of 2005. With oil futures hitting a record $57 per barrel this week, that could be disasterous for the company’s bottom line. To make matters worse, hedging beyond March was recently characterized as “minimal” by American’s CEO. He added that total fuel expense for 2005 could hit $5 billion in 2005, if prices remain high. American is only expected to have $19 billion in revenue this year, so 26% of that is paying for gasoline.
If oil keeps rising, it’s hard to see how this industry can avoid having more well-known carriers headed back to bankruptcy court.
Full Disclosure: I am short American Airlines (AMR) stock and own Delta (DAL) puts.
Yields on General Motors (GM) long-term corporate bonds jumped to over 10% in early trading this morning on news that GE Capital has pulled its credit facility. The bonds have rallied slightly off the lows, as traders take into account GM’s various other sources of liquidity.
Electronic Arts (ERTS) is down $9 after warning on 2005 EPS and projecting 2006 profits would be roughly flat year-over-year. Although the shares are getting slammed today, the valuation still doesn’t look all that compelling.
Martha Stewart Living (MSO) is nearing my $20 target price for taking profit on the Sep 05 $45 puts. I don’t think the stock looks attractive here, but at some point you just have to take your money off the table to avoid being too piggish. If there was any stock available to borrow (there isn’t), I’d like to short it with some of the put option proceeds.
General Motors (GM) Market Cap: $16.0 billion
Harley Davidson (HDI) Market Cap: $17.6 billion
General Motors (GM) shares are down $4 and account for more than half of the Dow’s 50-point loss this morning. Nobody should be surprised by this earnings warning. The U.S. auto makers are getting crushed by foreign competitors, and that phenomenon is nothing new. GM and Ford (F) rely on their financing divisions for the majority of their profits. In fact, I read somewhere a few months back that GM makes a profit of only $300 on each car sold (not including the loan GMAC extends to the buyer).
Companies like Toyota (TM) will continue to take market share in the United States. If you want to buy an automobile stock, buy that one. I know GM and Ford pay hefty dividends, but there are many other places to get that type of yield, and you won’t have to worry about capital depreciation. If you are leary of giving up on the domestic auto companies at these lowly levels, consider GM’s corporate bonds. That paper is paying more than 9% interest and comes with less risk than the common shares.