Airlines, Banks and Gold — The stock markets extended yesterday’s advance to a second day, with the Dow up 118 points to 12853, the S&P 500 up 11 points to 1420 and NASDAQ ahead 14 points to 2489. The biggest news weighing in was from Fed Chairman Bernanke, who gave the impression of interest rate cuts at the January 29th meeting. Gold also continued to advance, hitting $897 an ounce before closing at $892, $11 more than yesterday.Two gold stocks showcased yesterday are fully participating in this move — Yamana Gold (AUY: $16.30; Mkt Value: $6 B) up $0.62, or 4% and Kincross Gold (KGC: $22.65; Mkt Value: $14 B), up $1, or 5% for the day. For the newer readers of this newsletter, Yamana has a presentation video on display at the New York Stock Exchange web site ~ (www.nyse.com).
A second factor bolstering today’s market sentiment included Bank of America (BAC: $39.30; MV: $174B) announcing it was in talks to acquire Countrywide Financial (CFC: $7.75: MV: $4.4B). Since B of A already purchased 16% of Countrywide for $2 billion, even at the current stock price, it wouldn’t cost more than $4 billion for B of A to purchase the CFC shares it doesn’t own.
Countrywide’s stock price was $5.12 when we wrote about it yesterday. This isn’t a slam dunk…far from it. As B of A now begins reviewing what it may buy, it is conceivable that Countrywide’s contingent liabilities at the corporate level are so open-ended that instead, BofA merely purchases the underlying mortgages instead of the company. A gutsy move might be to sell CFC short, since the stock’s as high as it’s likely to get. Moreover, with some regional courts now hearing complaints of CFC mortgage application frauds, we suspect that CFC’s future will come to a head pretty soon.
A third development shaping positive market sentiment was news in the airline industry. The long-awaited consolidation of the airline industry’s majors appears poised to play-out. Delta (DAL: $15.98: MV: $4.3 B) is getting ready to merge with either United (UAUA: $32.19; MV: $3.7 B) or Northwest (NWA: $15.85; MV: $3.7B).
Maybe even a 3-way—altogether, a Delta-United-Northwest merger would be $50 billion in revenues, larger than Air France (AKH: $30.78; MV: $9 B) with $35 billion in revenues, and Deutsche Lufthansa (DLAKF.PK: $26.10) with $27 billion in revenues. Just to include the other major US carriers – add to this list American (AMR: $13.44; MV: $3.3B) and Continental (CAL: $23.25; MV: $2.2B). The collective market value of these 5 airlines is $17.2 billion.
Left out of this mix is US Air (LCC: $12.55; MV: $1.2 B). A year ago, this stock sold for $55 per share. At today’s stock price, and with 92 million US Air shares issued, that’s a loss of $4 billion in market value. With the other major airlines about to get their act together, it could easily be that US Air is left standing when the merger music stops. It wouldn’t surprise us if the remaining 2 or 3 majors have already carved up US Air’s markets amongst themselves…! Here’s a graph we think you’ll like, and it says it all —
Below the radar screen, there are a number of airline operators that might warrant attention. Consider Copa Holdings (CPA: $36.08; MV: $1.6 B). Copa Air transports people, cargo and mail via 108 daily flights between 36 destination-cities in North, Central and South America. Its hub is Panama City. Annual revenues are forecast to surpass $1 billion this year by the analysts covering the stock with EPS of $4 per share. (http://finance.yahoo.com/q/ae?s=CPA) This represents a multiple of less than 10 times earnings, a decent valuation in an industry coming into sharper focus. Here’s a link to CPA’s annual Investor Day: Click Here
Is there a cheap stock play in this industry…? Yes – Great Lakes Aviation (GLUX.OB: $2.25; MV: $32 mm). Revenues are $94 million, and the company is profitable. It also transports mail under long term contract, so with this contract, and $4 million in the bank, “Glux” will be around.
Let us hear your thoughts:
