Undoubtedly when the postmortem is written on the current stock market collapse, there will be examples of industries and companies who fell not on fundamentals but rather were simply caught in the downdraft. According to one prominent analyst, the U.S. airline business appears to be a good example of an industry that has been punished by Wall Street despite improving prospects.
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Airline equities have been battered along with the markets in the past week, with all of the major carriers down more than 20% and approaching 52-week lows. J.P. Morgan equity analyst Jamie Baker and credit analyst Mark Streeter in a joint note earlier this week said they have "never witnessed such a disconnect between fundamentals and equities," noting, for example, that United Airlines parent UAL Corp. currently trades just above $5 per share, a price close to what the analyst expects the airline to earn before taxes in 2009.
The peculiar element of this decline is that it comes as oil has retreated from its highs. An airline's fate is closely tied to oil prices, with Delta Air Lines Inc. for example estimating that every dollar rise in the price of a barrel of oil costs it $80 million annually. As oil soared to $140 per barrel earlier in the year airlines were forced to cut their networks and retreat from less profitable markets. The stocks moved downward on fears of another round of industry bankruptcies.
Now, with oil down to $80 per barrel and the capacity cuts still in place, airlines appear likely to deliver profits. But the market seemingly remains unconvinced, worried perhaps that a global economic slowdown will diminish travel and cost the airlines revenue.
What investors are missing, according to analysts, is that thanks to the cuts that have been made to airline schedules they are better-prepared for a slowdown. The most dangerous mix for airlines at this point seems an unlikely combination of a new spike in the price of oil and a global slowdown. Because oil appears unlikely to rise absent a global recover that presumably spur an increase in travel, the perfect storm appears unlikely to occur.
The bottom line for Baker and Streeter is the analysts have a hard time modeling losses in the industry.
"Fundamentals appear to be going one way, equities the polar opposite," the analysts wrote, adding that "perhaps investors simply need more time to accept the profit implications of an industry rolled back to its 1998 size while enjoying fuel prices below those of last year." - Lou Whiteman
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