IAG take off on US travel news

Equities
Investments

IAG shares just took off on reports the US is set to ease restrictions on UK and EU travellers.

Double-vaccinated passengers will be able to fly to the US, ending a total ban that has been in place since the pandemic, according to a report from the FT.

BA-owner IAG is a clear winner from this as its transatlantic business has been all but mothballed since the grounding of its jets due to the US policy.

IAG rallied over 10% on the announcement before paring some gains to trade +9.5% as of send time, whilst Air France KLM and Lufthansa added to earlier gains to trade around +6% higher.

Big read across for associated stocks – SSP rallied from negative territory for the day to trade up 4.5%, whilst WH Smith, which had also been trading lower, is now up 2%. And it’s more good news for Rolls-Royce, whilst TUI and Wizz Air are also having a good day.

EasyJet – though no transatlantic player – also up sharply as it indicates I think a direction of travel for the airlines that is way more positive than we have seen since really the peak of the vaccine optimism late last year and early 2021.

Whether or not the US makes the green list or not come October is another matter. I would assume the loosening of the rules – a win for the EU and UK – is based on the quid pro quo that they will make it easy for their citizens to travel to the US. Levels of vaccinations in the US are high enough to outweigh concerns about cases.

IAG: Big pop but only its highest since late August, though the move higher speaks of a more positive outlook. Lots of caveats and reason to be cautious still – getting bums on seats and filling those planes again will take much longer – who’s going to wear a mask for 9 hours? And what vaccines will be acceptable? Will children need to have a vaccine passport, too? A step in the right direction for sure nonetheless.

IAG price chart 20.09.2021

IAG, EasyJet & Ryanair: should you invest in airline stocks this year?

Investments

2021? Ryanair, EasyJet and IAG stocks are under observer’s watchful eyes right now and could find their wings once again in the coming year. Are they worth investing in right now?

Should you add IAG, EasyJet or Ryanair stocks to your portfolio?

Why Airline stocks could bounce back in 2021

Air travel stocks have taken a beating over 2020. Forbes reports that the NYSE Arca Global Airlines Index lost more than 31% over the previous year, with many major carriers reporting losses. As a whole, industry revenues fell 65% year-on-year across the board. Unfortunately, we have seen bankruptcies. UK affordable carrier Flybe was one such victim.

But there may be some hope that good flying conditions could emerge later in 2021.

Firstly, global cases may be starting to drop as research from John Hopkins University in the US suggests. From a January peak of 700,000 cases per day, the number has fallen to 500,000. That’s obviously still an alarming figure, but the drop is encouraging.

Vaccines continue to instil hope that some form of normality is in sight – maybe not crystal clear in a clear light of day, but still an emerging glow at the end of what seems like a very long tunnel. Uptake in countries like the UK and Israel has been exceptional, and its hoped vaccine programmes in other countries can catch up.

In some countries who reacted well to the virus, casual travel is already starting to return. China, for instance, saw over two million seats occupied on domestic flights towards the tail end of last year, and is projected to reach 90% pre-pandemic capacity by 2020. Indian carrier IndiGo’s CEO Ronojoy Dutta is confident domestic levels will reach 100% of pre-pandemic capacity by April. Australia is doing well too.

We’re stressing those numbers are domestic. International travel will take longer to recover, but it does offer a sliver of hope that normality for airlines could return in 2021.

However, with so many things about this pandemic, we simply don’t know. Airline stocks like EasyJet, IAG or Ryanair shares, may be worth buying now to hold onto later, but all investing and trading is risky. This may incur substantial losses if you are not careful or if market conditions do not enjoy less stormy skies.

EasyJet stocks

EasyJet lost two-thirds of its market cap in the pandemic’s initial phase. Since then, despite its fleet being grounded, despite the layoffs, and despite the cloudy outcome for airlines in general, the stock has regained 44% of its value. It may still be trading below its 1,500p pre-pandemic levels, but as of today, EasyJet shares are trading for about half that.

Cash reserves are a good barometer of a business’ resilience. EasyJet says it has about £2.5bn in cash reserves against monthly expenditures of £160m. That means it has enough to last the year. Backed with a £1.4bn government loan, the budget carriers balance sheet has been strengthened.

A potential explosion in international travel post-lockdown could mean UK travellers turn to low cost favourites like EasyJet to ferry them to warmer climes. That could mean a new rally on EasyJet stocks. For now, though, keep a watchful eye on them as uncertainty still in the airline industry.

IAG stocks

IAG owns British Airways, amongst other airlines, and is weathering the storm like all major carriers. IAG stocks have fallen 64% in the past twelve months, with its market cap falling to £8bn. Revenues have slumped too, falling over 70% in the third quarter. Not great.

Like EasyJet, however, British Airways was able to secure its own government-backed loan, to the tune of $2bn, to keep operational, so cashflow should be less of an immediate concern for investors right now.

Is this a case that IAG is simply too big to fail? Potentially. There may also be a bit of national pride playing into sentiment here. British Airways is after all the UK’s national carrier, and given the jingoist feeling of the current Conservative government, letting BA hit bankruptcy, especially in the face of Brexit, wouldn’t exactly play well with the Tory voter base.

IAG may have what it takes to show long-term price recovery. In September, IAG announced it had raised around €2.7bn in capital (£2.3bn), which would take total liquidity to €6.6bn (£5.7bn), with cash reserves of €5bn (£4.3bn). Forecasts suggest it may return to profitability by 2022, and even begun paying dividends again by then.

With the IAG share price rising 80% of the last six months, there may still an inkling of investor confidence surrounding the Group. But be warned: IAG is still trading 45% lower than its record highs, and with the way the industry is, until the planes start flying high, stocks might stay terrestrial.

Ryanair Stocks

Ryanair share prices are down 13% y-o-y in January, but, like the other stocks mentioned here, may have enough liquidity in the bank to ride out the coming year. According to Morgan Stanley, Ryanair has enough cash reserves to keep going for the next 15 months, totalling €4.5bn (£3.9bn).

Predictions in the short term are not great. Ryanair stocks may record losses of up to 73 US cents per share for the fiscal year ending March 2021. However, next year, earnings-per-share could be back up to 56 US cents.

Why? Well it’s a mixture of things, but its mostly vaccine-driven recovery leading to a loosening of travel restrictions. As suggested above, Ryanair has the liquidity to withstand another year, and there may be further potential for acquisitions, picking up airlines that are nearing bankruptcy, if market recovery starts to bear fruit towards the end of 2021.

Credit Suisse has confidence in Ryanair’s ability to improve cash flows going forward. The Swiss bank forecasts Ryanair to make €1bn in advanced bookings for the last quarter of 2022, and a further €600m in positive flows by that year’s end.

Ryanair stocks maybe one to watch.

But again, investment and trading always come with a high level of risk. Uncertainty is high right now for the entire aviation sector. Positive price movements for Ryanair stocks, as well as EasyJet and IAG shares, will be focused more on financial resilience and pandemic-battling measures in the short term.

 

Best UK shares for trading a Covid vaccine-led reopening story in 2021

Equities
Investments
D’ya like dags? Or indeed goats. The market rally in November was led by the dogs of the markets: energy, financials and Value were among the best shares to buy. Here are a few big-name stocks to watch in December and into 2021 on a ‘back to normal’ trade.

Macro highlights

  • Vaccines to support a return to near-normal by year-end 2021
  • Economic recovery will not be instantaneous but steady improvements are expected
  • Earnings per share should increase as corporates benefit from pro-cyclical growth
  • Inflation to rise as output gap closes and enormous savings glut is spent

Effective vaccines will be rolled out in 2021 in the developed world, supporting a return to normal economic and social activity by the year end. Whilst there are risks associated with the delivery of vaccination programmes globally, overall, it looks like countries will be able to support a ‘return to near-normal’ by the end of next year.

Return to normal ought to support European and UK equity markets with their strong weighting towards more cyclical stocks and sectors vs the US which has led the way with big tech and growth. A powerful value rotational trade was the dominant market trend in November 2020, leaving financials, energy and travel stocks among the top shares to buy, and while it will not move in a straight line upward, this pivot ought to continue through the earlier part of 2021 as markets adjust to economic and social activity returning to normal. December has begun very much like November was.

Britain has been hobbled by Brexit uncertainty for 4 years and UK equities have underperformed peers. Even allowing for the November recovery which was the best month for the FTSE 100 in 31 years, UK stocks have not had a good time of it in recent years. However, with Brexit risks likely to disappear and the UK in possession of the means to deliver a comprehensive vaccination programme, the outlook for the economy – and UK equities – may be about to improve. The FTSE 100 has an expected 2021 dividend yield of 4%, making it the most attractive among developed market stock indices. Is the dog of all dogs to finally ready to bark?

Two major caveats to this thesis – a Brexit deal and effective vaccination rollout are both essential, and not a slam dunk certainty.

GOAT: Get Out And Travel picks

IAG (LON: IAG) – Return of lucrative transatlantic routes will be big fillip for IAG shares. In the 11 months to December the stock was down by around 60%, making it the worst performer on the FTSE 100. Nevertheless, the stock rallied over 80% in the month of November as vaccine optimism drove the rotation trade. Whilst this may effectively have priced reopening in 2021, there could be further upside driven by on-the-ground improvements to travel. In addition to the roll-out of vaccines, efforts by airlines like BA and airports like Heathrow to find creative solutions to ending quarantine requirements for travellers such as digital health passes will progress and make it easier for travel to take place. Shares are not expected to get back to pre-pandemic levels next year – passenger travel levels are not seen returning to 2019 numbers for some years. But a steady reopening of the economy and pent-up demand among holidaymakers to get out and travel ought to support earnings recovery in 2021.

Cineworld (LON: CINE) – A GOAT favourite but huge debts are a factor. Shares have been very volatile, with the price collapsing when the company announced closure of UK and US screens due to pandemic and then surging on news of Pfizer’s vaccine in November. YTD, the stock was the worst performer on the FTSE 350 to the end of November. Cineworld was bloated before the pandemic – net debt is over $8bn thanks mainly to two large leveraged acquisitions in recent years. The fear is that there have been permanent behavioural shifts in consumers that will mean the market is forever smaller, however the stock is probably already reflective of these risks. It is hard to gauge right now what permanent damage is done to cinemas, but the advance of over-the-top streaming services, especially Netflix with its vast Hollywood budgets and ability to make feature films, has dealt another big blow.

Cineworld shares have recovered a further portion of the losses after the company secured a new debt facility of $450m and issued equity warrants representing over 11% of share capital. It also managed to get banks to waive debt covenants until June 2022 and further reduced costs. This new facility should act as a bridge to get to a point where it can reopen screens in the UK and US and get the cash flow moving in the right direction again. However, the company is working on the assumption that can reopen in May. Under this base case scenario, Cineworld has sufficient headroom for 2021 and beyond. But in the event of a further delay to cinema reopening, whilst it has sufficient liquidity ‘for a number of additional months’, it ‘may require lender support in order to deploy that liquidity’, management said today. Bums on seats by May is dependent entirely on a vaccine – if there is a stock trading on this vaccine roll-out it’s Cineworld. Warner Bros decision to stream all new releases as soon as they they hit the big screen is a blow and sent shares lower by 14% on Dec 4th.

Energy has been a laggard but the likes of Shell (LON: RDSA) and BP (LON:BP) should stand to benefit from stronger average crude pricing in 2021. Both fell by around 40% in the 11 months to Dec YTD. Whilst the International Energy Agency (IEA) has been right to sound cautious over the demand pickup in the early part of 2021, oil markets will be trading largely on sentiment. There are clear near-term risks from rising inventories – a lockdown in the US would lead to demand destruction in Q1. Tertiary lockdowns in Europe cannot be ruled out in Q1 and even Q2 should the virus reappear in strength. OPEC and allies will continue to hold the fort, albeit not as comfortably as in the past. Towards the end of the year, oil markets may also benefit from an expected supply crunch. The spectacular collapse in oil markets due to the pandemic led to a massive wave of capex cuts – according to Rystad about $100bn cut – which threaten to flip the market from glut to crunch as vaccines start to take effect and boost the demand side. Risks remain for old world energy players though as ESG investing takes on added importance.

Reflation picks: Banks

Lloyds (LON: LLOY), Natwest Group (LON: NWG) both were among the largest decliners on the FTSE 350 YTD through to the end of November, down in the region of 30-40%. Both have a lot exposure to the UK economy, especially the housing market and consumer spending. Two factors could support gains. First, the reflationary environment in 2021 as vaccines encourage a return to normal ought to see a steepening yield curve and support net interest margins. Secondly, clarity over Brexit should be a positive for the UK economy. Other factors, like the remarkable resilience of the housing market and relative strength in consumer spending, are also supportive.

Share prices of both have fallen this year as 2020 has really been a story of UK plc risks – negative rates, deficits, pandemic-related GDP destruction and of course Brexit. 2021 should see a more encouraging outlook for the UK economy and the removal of tail risks like no deal Brexit. Near-term, rising unemployment will be a problem but ultimately a ‘return to normal’ in2021 will support financials. A resumption of dividend payments in February when results are announced would be a big help, too. In many ways banks have been unfairly swept up in the markets’ pandemic crossfire as investors followed the playbook of the last war: financials are in much better shape this time and well provisioned to weather the storm. As of the end of November, Lloyds traded at a price to book ratio of 0.55, whilst Natwest was at about 0.47.

Meanwhile Barclays (LON: BARC) price to book was a measly 0.36. Some may doubt the sustainability of handsome trading revenues from its investment bank, but the outlook is still overall positive. Third quarter results smashed expectations, with pre-tax profits of £1.2bn double what was expected. Loan loss provisions were 40% below expectations, albeit higher than last year.

BT scraps dividend until March 2021, IAG sitting on €10bn cash

Equities

Another one bites the dust – BT Group has become the latest casualty in the massacre of FTSE dividends. Management have taken the axe to this year’s final dividend and all next year’s pay outs.

I’ve been arguing they ought to have done this sooner in order to free up capital for infrastructure investment and right the wobbling balance sheet. Net debt stands at nearly £18bn, ballooning from £11bn a year ago, though management say this is largely down to the implementation of IFRS 16.

Another headache for BT has been confirmed – the O2 and Virgin Media deal is going ahead. Whether or not you agree that companies ought to be prioritising investment or survival over shareholder returns, the income investor is not going to find life easy for the next 18 months. Investors ran for the hills – already-pressured shares opened 11% lower.

IAG – €535m operating loss before exceptional items in the first quarter but by far the worst is to come with demand collapsing. It booked an exceptional charge in the quarter of €1.325bn on derecognition of fuel and foreign exchange hedges for 2020. This swung reported losses to €1.683bn.

IAG at least seems to be able to ride out the storm: management are touting €10bn of cash and undrawn liquidity facilities going into the headroom.

Against this they have reduced weekly cash operating costs to €200m from €440m and reduced capex this year by €1.2bn. It won’t need to take delivery of new aircraft if it’s not flying. IAG expects to be running at best at 50% from July but won’t be back to 2019 levels of demand until 2023 at the earliest.

Morning Note: Trade war escalates, Uber IPO caution, IAG profits sag

Equities
Forex
Indices
Morning Note

Tariffs on $200bn worth of Chinese exports were raised to 25% last night. Trump was true to his word, and there is no can kicking. This marks a sharp escalation in the trade spat, but it’s not gone nuclear yet.

Talks between the Chinese and the Americans are continuing today, although we don’t hold out much hope of anything meaningful being achieved this week.  

It all tends to suggest Mr Trump is playing one of his aces in order to force the Chinese into concessions. His bet is that the US economy can weather any hit from tariffs better than China. He is probably right but this will not help ease uncertainty about the global economy. Beijing is weighing whether to retaliate. 

Yesterday the S&P 500 bounced off its lows, closing down just 0.3% at 2870.72, having plumbed lows around 2835. The Dow was offside by 139 points on the close, but was over 400 points lower at one point. Algos seemed to bidding it up after the ‘beautiful letter’ nonsense.

Oil has rallied, indicating markets have had enough of the selloff. Brent was last pushing up at 70.75, above the key 70.60 resistance point. The flag pattern does look like it could be a bullish continuation pattern that is just about complete – watch for a leg higher. But failure to cement the tentative gains we see this morning would be bearish – look for the area around 69.50 for support.

Asian stocks bounced overnight and European futures point higher today. Chinese stocks were last about 3% higher – just remember how much these stocks had sold off earlier in the week.  There is still hope that a deal will be done.

Uber prices at low end 

Uber priced at the bottom end of the range at $45. It’s a rough time to be coming to the market after the selloff this week but this IPO exists to a degree in its own bubble. Are you betting on the long payoff? If not, you may well be disappointed – profits are not coming any time soon.  

But shares could yet pop higher today, partly because of this conservative approach that Uber clearly learned from Lyft’s bumpy ride post-IPO. I said yesterday (Uber set for big pop despite Lyft worries, 09/05/19) that I would not be surprised if the people selling Lyft stock are simply doing so in preparation for the Uber listing, so be careful reading too much into the Lyft troubles. FOMO is a strong emotion. 

Nevertheless, my main concern is the slowing revenue growth. Whatever the cash burn, you’d want to see accelerating top line growth in a disruptor coming to market.  

IAG profits sag

Profits at IAG were hit by rising fuel costs and a big FX headwind, whilst we see a broader thread across airlines with margins being competed away. Excess capacity remains a problem, as we heard from Lufthansa. In fact, we can pretty much regurgitate what we noted about Lufthansa – lots of competition means no one has the pricing power, whilst labour costs are a factor, but the biggest headwind right now is fuel costs, which were up 15.8%. Non-fuel costs were 0.8% higher. 

Although passenger revenue growth was at a healthy clip, up in excess of 5%, first quarter operating profit slumped to €135 million before exceptional items, which was down 60% from a year before on pro forma basis. Profits after exceptional items – which were zero in Q1 – were down 86%. FX headwinds knocked €61m from the bottom line. 2019 operating profit is seen in line with 2018 – which means no growth in the year ahead. 

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