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Continental Flies Through Clouds Of Red Ink
Continental Airlines (NYSE:CAL) reported a first quarter loss, but some on Wall Street were cheered because the losses were not as substantial as predicted. Following on the heels of losses from Delta (NYSE:DAL) and United (Nasdaq:UAUA)and last week's dismal figures from American Airlines (NYSE:AMR), Continental joins the major carriers that are flying through clouds of red ink. Southwest Airlines (NYSE:LUV) experienced close to flat earnings in the first quarter, nearly bucking the trend. But many on Wall Street think investors should take a closer look at the earnings trends and the business conditions of the fliers.
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A Reason For High Spirits?
Individuals must understand how the investing/trading business goes, with both professional traders and Wall Street institutions having different criteria than retail investors. Money managers often look for the first positive twitch as a sign of economic recovery from recession. So the airlines, which have been battered and bruised for quite a long while, are ripe for an upturn. Yet, Continental recently announced its fifth straight quarterly loss. Its revenue declined 17%, while business traffic dropped 11%. The company's losses totaled $136 million, or $1.10 per share (or $1.07 per share, excluding $4 million in extraordinary charges). Losses for the same quarter a year ago totaled $80 million loss, or 81 cents a share, which means conditions are worsening for the carrier, especially considering the 40% drop in fuel costs. In an alarming note, the company mentioned that transatlantic fares were off by 35%. (Learn more about this sector in The Industry Handbook: The Airline Industry.)
Other Carriers Face Turbulence, Too
Delta merged with Northwest Airlines, but has not yet found the efficiencies necessary to turn a profit. Its losses totaled $794 million, down from a staggering $6.39 billion in the same quarter last year. United similarly narrowed its losses. In fairness to Delta, excluding the continuing merger-related costs, the company reported that it would have posted earnings of 84 cents per share. However, its revenue did not meet Wall Street expectations. Still, its numbers need to be interpreted on an apples-to-apples accounting basis due to the merger. According to Thomson Financial Networks, analysts project a profit totaling 59 cents per share in 2009 and $2.10 per share in 2010.
No such apples for United, however. United lost $382 million, which is better than losing the $549 million it lost during last year's first quarter. But even in Wall Street math the numbers are dismal. The thing that's been so damning about the airline industry in the last year or so is that profitability continues to be predicted as just around the corner. So far, however, that hasn't been the case. Perhaps it's time to take a different approach, as some observers are already.
Skies Half-Empty
JP Morgan analyst Jamie Baker suggested that investors and traders sell airline stocks into this mild rally, as he sees further disappointment and losses ahead. The transcontinental route business show no signs of improving anytime soon, so Baker, in explaining his downgrades of Continental, put in for lower estimates at United as well.
Analyst ratings are, and should be, subject to close scrutiny if not skepticism. Not only is Baker not cheering along with the assumption of this yet-to-be-seen return to profitability, he seems to be saying that it's farther off than others on Wall Street are willing to admit. Even Southwest, often regarded as one of the best run airlines, garners only a mild upgrade to a "neutral". (The type of stocks that analysts cover can heavily influence their predictions. Learn more in Analyst Forecasts Spell Disaster For Some Stocks.)
Use Your Own Metric
With the almost daily trashing of fundamental, long-term investment measures in this supposed ultra-trader's market, if you're not investing, but trading, and if you're not trading on earnings, but technical analysis, charts or your own set of secret parameters - why bother with earnings at all? When observers, traders and investors continually try to conjure up something good on an industry that hasn't worked right for a number of years, and when the big five are still losing money, why bother? (Break through the clouds to see if these stocks will rocket higher or crash and burn in Is That Airline Ready For Lift-Off?)
Bottom Line
Savvy traders will always make out, regardless of earnings or fundamental numbers. And unwise ones won't. So fundamental investors would do well to watch and wait for some actual real earnings to appear at Continental, although Delta and Southwest would make better candidates.
IN PICTURES: Vacation Savings Tips
A Reason For High Spirits?
Individuals must understand how the investing/trading business goes, with both professional traders and Wall Street institutions having different criteria than retail investors. Money managers often look for the first positive twitch as a sign of economic recovery from recession. So the airlines, which have been battered and bruised for quite a long while, are ripe for an upturn. Yet, Continental recently announced its fifth straight quarterly loss. Its revenue declined 17%, while business traffic dropped 11%. The company's losses totaled $136 million, or $1.10 per share (or $1.07 per share, excluding $4 million in extraordinary charges). Losses for the same quarter a year ago totaled $80 million loss, or 81 cents a share, which means conditions are worsening for the carrier, especially considering the 40% drop in fuel costs. In an alarming note, the company mentioned that transatlantic fares were off by 35%. (Learn more about this sector in The Industry Handbook: The Airline Industry.)
Other Carriers Face Turbulence, Too
Delta merged with Northwest Airlines, but has not yet found the efficiencies necessary to turn a profit. Its losses totaled $794 million, down from a staggering $6.39 billion in the same quarter last year. United similarly narrowed its losses. In fairness to Delta, excluding the continuing merger-related costs, the company reported that it would have posted earnings of 84 cents per share. However, its revenue did not meet Wall Street expectations. Still, its numbers need to be interpreted on an apples-to-apples accounting basis due to the merger. According to Thomson Financial Networks, analysts project a profit totaling 59 cents per share in 2009 and $2.10 per share in 2010.
Skies Half-Empty
JP Morgan analyst Jamie Baker suggested that investors and traders sell airline stocks into this mild rally, as he sees further disappointment and losses ahead. The transcontinental route business show no signs of improving anytime soon, so Baker, in explaining his downgrades of Continental, put in for lower estimates at United as well.
Analyst ratings are, and should be, subject to close scrutiny if not skepticism. Not only is Baker not cheering along with the assumption of this yet-to-be-seen return to profitability, he seems to be saying that it's farther off than others on Wall Street are willing to admit. Even Southwest, often regarded as one of the best run airlines, garners only a mild upgrade to a "neutral". (The type of stocks that analysts cover can heavily influence their predictions. Learn more in Analyst Forecasts Spell Disaster For Some Stocks.)
Use Your Own Metric
With the almost daily trashing of fundamental, long-term investment measures in this supposed ultra-trader's market, if you're not investing, but trading, and if you're not trading on earnings, but technical analysis, charts or your own set of secret parameters - why bother with earnings at all? When observers, traders and investors continually try to conjure up something good on an industry that hasn't worked right for a number of years, and when the big five are still losing money, why bother? (Break through the clouds to see if these stocks will rocket higher or crash and burn in Is That Airline Ready For Lift-Off?)
Bottom Line
Savvy traders will always make out, regardless of earnings or fundamental numbers. And unwise ones won't. So fundamental investors would do well to watch and wait for some actual real earnings to appear at Continental, although Delta and Southwest would make better candidates.
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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