Monday, 19 October 2020 / Published in Analysis

The unpresented hard landing in the global aviation industry demonstrates the significant impact and magnitude of the COVID-19 pandemic in the entire airline space. According to official travel data, more than 40 commercial airlines have already bankrupted or suspended their operations in 2020 so far, failing to survive the worst financial crisis in aviation history.

The next few months will be rocky for the airlines as coronavirus cases have risen in the U.S. and Europe at their highest level since summer. Many countries have already reinstated tougher social distancing rules and rolled back previews re-opening measures to curb the spread of the virus, creating a negative dynamic for the aviation industry once again.

Stock performance:

The shares of some major US carriers such as Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL) have lost more than 50% of their market value this year so far, contrasting with gains of 50% for the tech-related Nasdaq 100 Composite and 10% for the S&P 500 index.

Delta Air Lines and United Airlines delivered misses on third quarter-Q3 revenues that dropped at least 75% year-over-year, which was largely reliable with the drop in airport traffic observed during summer, low passenger revenues, and large operating costs.

Government support:

Governments around the world have minimized the damage in the aviation industry by supporting the carriers from going bankrupt during the first months of the pandemic. The industry’s revenues had been hit so hard from the pandemic-related lockdowns and the travel restrictions, that governments had no option but to support the carriers with billions of dollars to avoid layoffs.

The official authorities together have provided more than $150 billion in support, including direct aid, wage subsidies, corporate tax relief, and specific industry tax relief including fuel taxes. Thankfully for airlines, the financial aid does not add more debt to their balance sheets.

The US administration is planning to provide a new $25 billion bailout for U.S. passenger airlines to keep tens of thousands of workers on the job for another six months. The new financial aid will extend the prior $25 billion airline payroll support program of mostly cash grants approved by Congress in March, which it expired on Sept. 30.

American Airlines and United Airlines began laying off 32,000 workers at the end of September but had said they would change course if Congress reaches a deal on a new government program to fund payroll costs.

Furthermore, carriers have applied cost-cutting measures by parking thousands of aircrafts, canceling non-profitable routes, and laying off thousands of employees. Worth mentioning that many airlines were already struggling before the pandemic hit, but they now being in a better position because of government help.

Relaunch Boeing 737 Max flights in December:

Airlines are planning to return Boeing 737 MAX passenger jets back to service at the end of the year, provided they are certified by the U.S. Federal Aviation Administration.

At the beginning of October, the European regulators cleared 737 MAX’s return back to the skies, saying, safety changes Boeing made were satisfactory.

This is a very important development for the aviation industry after the two deadly 737 MAX crashes killing 346 people in a span of two years in Indonesia and Ethiopia. A congressional report pinned the blame for the fatalities on both Boeing and the FAA.

Outlook for next quarters:

Many analysts have downgraded the outlook for the airline’s stocks to negative as the short-term risk has increased due to the resurgence of covid-19 cases around the world together with the application of fresh lockdown measures and travel restrictions.

With demand recovery in most regions stalled and airlines still struggling with revenue generation and high cash burn rates, the market analysts expect to see more pressure in the final quarter of 2020 and the first quarter of 2021 at least. Carriers are expected to have Q4 2020 revenues only at 1/3 compared to Q4 2019, in response to the strict cleaning protocols, middle-seat blocking policy, and weak air travel demand.

The International Air Transport Association (IATA) expects that the passenger traffic is likely to return to pre-pandemic levels only in 2024, a year later than previously projected and some capacity may be lost for longer.

The year 2020 was a “lost year” for the airlines, and their focus is to minimize their operational costs, to apply budget-constraint measures which will improve their cash flow metrics until rebound will be reflected in air traffic following the distribution of an effective vaccine within 2021.

Tuesday, 07 July 2020 / Published in Analysis

Tesla Inc. (TSLA), the California-based electric vehicle maker has become the world’s most valuable car company with $250 billion market value, with its share price climbing to record highs of $1.400 at the beginning of June. Tesla’s market capitalization is well ahead of traditional automakers such as Toyota’s $200 billion and it is almost 10-times that of Ford Motors and General Motors.

Tesla shares have surged 50% over the first days of June and up nearly 300% since the start of 2020, gaining support from the stronger-than expected Q2 delivery figures and production in a time were the global car sales dropped by more than 30% amid coronavirus pandemic.

Fig.01: TESLA share, Weekly chart

According to company’s latest report, the Q2 delivery tally was 90,650 units, as the Model 3 and Model Y deliveries hit 80,050 while Model S and Model X deliveries were pegged at 10,600. The new Model Y, an electric SUV, is expected to surpass the sales of its popular Model 3 electric four-door sedan in the next quarters, while the deliveries of the electric truck are expected for late 2021, fuelling Tesla’s exceptional sales growth and profitability for the next years.

The record deliveries came despite the 1.5-month shutdown of the company’s Freemont, California production facility and a sharp decline in overall U.S. auto sales. However, Tesla said earlier this year it would expect to deliver a combined 500,000 vehicles of Model 3 and Model Y by the end of 2020.

Another major catalyst for Tesla’s record valuation is the Chinese market, where the brand-new Tesla’s Shanghai factory is expected to be able to deliver up to 4.000 vehicles per week in the second half of the year.

Friday, 03 July 2020 / Published in Analysis

As we closed the quarter, US markets had their best quarterly performance since 2008. Not bad considering the devastation we witnessed when COVID19 broke out. However, the bounce is not spread out evenly against all sectors or stocks.

Technology related stocks performed the best, partially because they were not affected by the pandemic, partially because they were a beneficiary of it. However, most stocks did not benefit and even more have seen losses rarely seen by most of us.

The problem with the market currently is that within the technology space, most stocks are either extremely expensive, or borderline bubble territory. In fact, most of the technology space today is simply not investable by almost any valuation method.

Then there is another very big percentage of the market that is very difficult to invest, because the COVID19 pandemic is still in play and we simply don’t know to what extent these companies will be affected (or not). Most stocks in this category are fairly valued, but we have to wait to see to what extent the pandemic has affected them. More clarity is needed for this category, and we will get this clarity after Q2 results get published.

And then there is another batch of stocks that either haven’t been affected, or have been affected very little, yet trade for scrap and no one is buying them. Yes, this is where the real value is, especially in the small cap space, but they can’t seem to get a bid.

Investors dilemma for Q3

So, the question is, do you buy in the technology game (in essence momentum trading) hoping the sky doesn’t fall under you, or do you buy stocks that have the potential to increase in value, but are out of favor?

It’s a difficult question to answer these days, because the technology trade has been successful for a while now. At the same time it’s very difficult to invest in many of these companies when one considers the balance sheet and the valuation (market cap) when you manage money for a living. Simply put, from an active manager’s perspective going with the flow and trading technology is not easy to do.

Bottom line

We think the easy money has been made during the last quarter’s bounce. There are simply too many variables and unknow factors to buy stocks blindly simply because they are in style, or because everyone else is doing the same.

So, we will keep doing what we know best, buying stocks that have value and can perform under difficult situations. Because when there is room in the balance sheet for error, eventually stocks bounce back. However, when the balance sheet is in question, and the sky falls under you, it might be a very long time before you recover.

Either way Q2 result will probably be worse than Q1 and investors have to be extra careful. And buying a good balance sheet, at a fair valuation, is always a recipe for prudence.

Friday, 03 July 2020 / Published in Analysis

For many years, many have said that the EURO is a currency destined to fail. Yet, Europe has been getting richer every year, and its citizens enjoy the highest living standards in the world. Yes, Germany’s growth is mediocre at best, however this does not mean that German citizens haven’t received above inflationary pay raises over the years. In fact, with Germany’s current account surplus of around 7% (5% for the Euro Zone), it’s difficult for the average salary to stay the same.

There are many problems in Europe, such as the banking sector, however this has nothing to do with the Euro, but with the fact that banks were never repaired to begin with post of the 2008 crisis as they were in the US. And for those who say that negative rates have not done much to fix Europe’s problem, I say negative rates have nothing to do with Europe’s problems, and are rather a consequence of Europe’s success.

The recent COVID19 crisis could be a reason for faster political union in Europe. By that I mean a Federal Army, Coast Guard, Federal Courts and prison system, banking unification and fiscal unification. Granted that these are very long-term goals in the EU, however they have been proceeding at a snail’s pace.

The 750 billion-euro joint debt plan to help Euro economies cope with the COVID19 pandemic could be a reason for unification among the bloc’s 27 member nations to roll faster.

The importance of this joint debt issue cannot be underestimated, because it is something very few thought was possible before the COVD19 crisis. Yes, European leaders who were against joint debt issues have in a way been forced to agree, however this is still a first step towards a fiscal union.

What’s next? Perhaps a European Federal Coast guard, to tackle the immigration crisis? Perhaps the long-awaited banking union, with a federal system to guarantee deposits? Perhaps a Federal Securities and Exchange Commission, that will at last replace local officials, that sometime act as cheerleaders for local companies and turning a blind eye, as the recent case of Wirecard in Germany.

The bottom line is that the COVID19 pandemic might be a reason for faster political integration in Europe. Yes, Europe still has a long way to go, but the recent joint debt issue, although being a very tiny first step, might speed things up.