CAL Challenges
"We continue to face significant challenges" said Larry Kellner in the most recent Continental Airlines (CAL) 10Q. Hmmmm. My general policy is to buy fantastic companies at reasonable prices and wait for the market to get excited about the company. But CAL does not qualify as fantastic, just tempting and curious.
I think the most recent Chairman's statement is one of the most important pieces of information about a stock. Here are a couple more.
"We are confident of showing good progress over the next twelve months and delivering value to all stakeholders." So said Anil Agarwal, Chairman of London listed Vedanta Resources plc, a company well worthy of further investigation in my opinion. A nice statement but very conservative. How about:
"We believe that Peabody's successes in 2005 and plans for 2006 mark the early stages of a long period of sustainable growth and ever-improving financial results." Now that is nice! Gregory H. Boyce, CEO of coal miner Peabody Energy is obviously confident about his company's prospects.
So I didn't sell Google and I didn't buy CAL. I think to buy a company like CAL you need to have a definite feeling for the direction of oil prices. I think that if operations in Iraq were to cease then the price of crude would fall but apart from that I have no idea. As operations in Iraq look like continuing for many years I really have no reason to buy CAL. So I won't!
How about Peabody? According to Yahoo!, 16 analysts estimate its growth over the next 5 years to be 50% annualy, giving it a PEG of 0.45. Wow!
What about Vedanta? Analysts estimate that 2007 earnings will be almost double that of 2006. After a recent rise the forward PE is still under 25. Another Wow!
Google is on a much higher PE than these guys but growing slower. So it is bye bye to GOOG and hello to a miner. Better late than never I guess.
posted by Phil @ 7:48 pm
2 comments
2 Comments:
CAL will lose about 80 cents per share the first quarter while paying an average of $1.91 for fuel. This quarter, the company, will make about $1.20 if fuel costs stay where they are now. The facts being missed by most observers is that airline load factors are higher than ever before (excluding 1946 which was an unusual situation at the end of WWII). The high load factors (CAL just completed its second March in a row at over 80%) have allowed airlines to raise prices steadily.
The math is simple, more seats full and a higher fare per seat. The growth in revenues is a multiplication of the two factors which has shown up right after labor costs have been cut by over $500 million per year. Again, simple math, higher revenues and lower costs leaves a very green bottom line. A bottom line that incures no taxes because of prior loss carry forwards!
Sooner or later, oil prices will return to the $45 per barrel price or lower (billions of barrels of heavy oil is avaiblable for production costs of less than $45), in the mean-time, airlines will raise fares until they make a lot of money regardless of fuel prices. Look for CAL to reach $170 per share in three years.
Nice to have you reading Jack!
Investing in an airline is effectively a play on the price of oil so perhaps those who don't have a feel for oil prices should stay clear.
What I am tempted by is an investment in CAL along with a share that will profit from higher oil prices - something like BTU. In that way if the oil price rockets then the CAL losses may be offset by BTU gains.
If oil stays about the same then they will probably both do OK.
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