I’ve been screening in the industrial sector. My universe includes equities with mkt cap > $200 million listed on NYSE, Amex, and Nasdaq. Airlines make up almost half (47%) of the industrials with cash and sti per share greater than their share prices. Of the airlines, 42% have cash and sti per share in excess of their share prices. 59% have book values greater than their mkt caps. Can anyone provide insight as to why airlines would have so much cash and shareholder equity relative to their market values?
All those 5 buck water revenues. That and lower fuel costs and the general hoarding of cash to get ready for tough times ahead.
This is operating cash. These guys have significant daily cash needs and it’s simply a temporary parking place. I’d imagine that cash on hand at the begining of a month is entirely turned over within a few weeks. Take a look at a statement of cash flow, that will tell the rest of the story…
Possibly because they are one of the few business that collect the cash for their services long before they provide them, rather than selling on credit as most industrials do.
homie: I think you’re on to something with the $5 water revenues – surcharges for extra carry-on luggage could also be a factor. If times aren’t as tough as they expect, though, wouldn’t these stocks be undervalued? salvaNJ: Good point. Looking again, I see that a lot of these companies have little or negative working capital – that could be indicative what you said. Freakshow: Another good explanation, but why are book values of equity so high relative to market values?
simple. they are ‘retail’ (ie. sell to customers for services) but don’t have inventories and they have high variable costs so they must be cash rich or else like someone said above, they wouldn’t be able to make it through the month. also, most of them were also not expecting oil to crash so they loaded up on cash to meet high working capital costs due to expensive oil, which no longer exists. but now they now have it for the downturn.
Thanks all!
Wondering if many of the airlines have hedges on their books for 100+ oil? If they do, how does this effect their current profits? Do they have to purchase the oil at hedge price now, or do they just get hit with a loss on a smaller call price?
They’re definitely losing money on all those futures contracts if any have entered into them. I’d say bottom lines will be hurt depending on how much they’ve hedged.
You gotta take into consideration operating leases as well. Most of this companies have them.
Seems to me that I remember reading an article somewhere about airline hedging when oil was at 140 (or similar). I think I remember that Southwest had hedged up lots for the next couple of years but the others were much lighter. I wouldn’t bet any money on thse recollections, but the information is available.
I think jet fuel forward contracts would be another reason for high cash balance…any contracts purchased when oil was above $100 would require the airlines to post additional cash collateral as prices have fallen. This would show up as restricted cash on the BS.
I think the reason many large US airlines are cash rich has less to do with high cash working capital requirements and more to do with restructurings over the last decade. I don’t know the US sector that well, but a lot of airlines have been through chapter 11 recently and stripped out their debts that way. There are plenty of airlines aorund the world that are not cash rich right now and either have gone bust or are likely to soon. I also don’t believe the current value of hedging positions is something that drives airline valuations. In my experience, analysts and investors don’t put too much emphasis on hedging positions good or bad as they can so easily reverse. Just look at LUV. Its poitions looked brilliant 6 months ago. Through the cycle, it is assumed that no-one can outsmart the market from hedging which is why a lot of analysts and investors prefer it when airlines do not hedge. It’s not quite as stark as say hedging by gold miners, but the principle is that it’s better to try not to call the kerosene market. Also, when it comes to airlines P/B is meaningless. You must work out a NAV taking into account off balance sheet leases and the market value of their aircraft amongst other things. Generally you will find that while airlines look expensive on a P/B basis, they are trading at a hefty discount to NAV.