by Staff Reports Money Morning, Money Morning
Airline stocks have had an impressive run over the last year, but as the vaccinations spread and restrictions drop, investors are wondering why these stocks aren’t ratcheting higher anymore.
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Triple-digit gains for year-ago levels are the norm for most of the industry. Thanks to the pandemic, airline traffic dropped dramatically last year, and if the federal government had not stepped up with bailout plans, there would be a lot fewer airlines today.
Now we are seeing airline stocks begin to flatten out even as business is improving.
Some traders and investors are puzzled by the slowdown in recent weeks.
They should not be. We aren’t.
Shares of many airlines are now back to pre-pandemic levels. There is no way that most of these stocks should be back at this level.
Here’s why airline stocks have plateaued and when they’ll go higher again…
Airline Stocks Are Still Waiting for a Real Recovery
Yes, travel is returning. That is to say, leisure travel is returning.
Business travel will take years to recover, and some think it may never get back to pre-pandemic levels.
Many businesses discovered that using communication platforms like Zoom Video Communications Inc. (NASDAQ: ZOOM) and online document signing services have replaced the need for many trips. Conducting business online in many cases was more efficient, fast, and a lot cheaper than having staff spend a day traveling, a day in meetings, and a day traveling back.
Much of the earnings that analysts expect to see in 2021 are already more than baked into the stock price.
Southwest Airlines Co. (NYSE: LUV) made $4.27 a share in 2019. They are going to lose money again this year, according to Wall Street forecasts. Analysts hope they make $3.06 in 2022. Yet the stock is already trading above its 2019 highs.
Delta Air Lines Inc. (NYSE: DAL) earned $7.16 in 2019. It is expected to lose about $3.84 a share in 2021. Analysts are hoping it makes $4 a share in 2022.
American Airlines Group Inc. (NYSE: AAL) earned $4.84 pre-pandemic. This year it will lose more than $8 a share. Next year, if the analysts are right, it will only lose about $0.12 a share.
We could go through all of the airlines, but you get the point. Airlines are losing money this year, and profits next year will be lower than before COVID-19 impacted the industry.
It could take as long as four years for profits to get back to 2019 levels.
There’s Downside Risk for Airline Stocks Too
Now let’s talk about the debt. Southwest saw its total debt almost triple during the pandemic. Delta did see its debt triple. American Airlines is already swimming in debt, and it added another $16 billion during 2020.
Lower profits and higher debt levels are not usually reasons for stocks to move higher.
Airlines are going to have an issue with fuel prices as well. Oil prices are moving higher in anticipation of higher demand as more of the global economy is able to reopen, and that’s going to be a problem for airlines with an aggressive hedging program.
The stocks should not still be at the almost bankrupt level that they were in March of 2020, but prices probably should not be as high as they are at the moment either.
It looks to us like airlines got caught up in the recovery trade and were lifted a little too high. At a minimum, prices need to rest for a bit.
Airline stocks are priced correctly only if you believe everything will go perfectly for them. We do not live in a perfect world. They are in one of the most economically and geopolitically sensitive sectors. If the economy slows for any reason, airlines will feel the shock first.
If we get a coronavirus variant resistant to the vaccine that causes further travel restrictions, it will hurt airlines.
If China’s misbehavior in the South China Sea gets too hot, it will hurt travel to Asia.
If the current Middle East tension continues to heat up, it could cause a spike in oil prices, which will really hurt airlines.
Don’t be surprised if airline stocks tread water for some time. Business is returning, but it’s not coming all the way back anytime soon. The far more profitable business travel part of the industry may not ever come all the way back.
Balance sheets are strangling in debt, and if anything goes wrong in the economic recovery, we will see bankruptcy filings.
Business being better than it was in the disastrous levels of 2020 is just not a valid reason for the stocks to keep moving higher.
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