The coronavirus pandemic continues to weigh on the global economy, and maybe no industry has been hit harder than commercial transportation. Airlines in particular face a tough path forward; even as the economy has recovered somewhat, and air travel has improved from the lows in April, airports are still only screening about one-third as many passengers as they were a year ago.
As a result, the biggest airline stocks are still down more than from their pre-pandemic highs. Shares of Delta Air Lines (DAL 0.46%) are down 53%, while both American Airlines (AAL 1.70%) and United Airlines Holdings (UAL -0.16%) are down more than 60% as of this writing. Of the largest U.S. carriers, Southwest Airlines (LUV 1.08%) has been the "best" investment, down 37% from pre-pandemic highs.
Yet investors have continued to come back to airline stocks on the prospects of the post-coronavirus recovery. While a recovery will eventually happen, climbing global COVID-19 cases and travel limits around the world are likely to weigh on the industry -- and result in continued massive losses -- for an extended period of time. That creates substantial risk of losses for investors.
At the same time, NV5 Global (NVEE -1.26%) continues to be overlooked. It's growing revenues at a high double-digit clip, and the infrastructure industry it works in is primed for multiple decades of global growth. Yet despite its position, performance, and wonderful growth prospects, NV5 shares are down 32% from their 12-month highs, and represent an incredible value for this high-growth -- and not struggling -- business.
Risks to the "quick recovery" thesis for airlines
Airline investors are pinning their hopes on a combination of rapid vaccine development and high-speed testing, which would open the floodgates on commercial air travel. United recently announced that it would start offering COVID-19 tests for passengers flying from San Francisco to Hawaii starting in mid-October, so we are starting to see a step toward testing for air travel.
However, the reality is, the pharmaceutical industry's capacity to manufacture the volume of tests is limited, and it will take a lot of time to built out that capacity; moreover it's a near-certainty that most of the initial rapid-test capacity that gets brought to market isn't going to go to airlines. It's far more likely that workers in healthcare, child care, education, essential retail like supermarkets, and other critical industries will be first in line.
As to the progress on a COVID-19 vaccine, we're still many months away from full regulatory approval. Pfizer and its joint venture partner BioNTech, leaders in the race to develop a vaccine, just announced expanded enrollment in their phase 2/3 trial, and expect to have initial data in October. Meanwhile, Johnson & Johnson is just beginning its phase 3 trial for its single-shot vaccine candidate. But at this stage, most of the candidates are still finishing up enrollment in their trials, so even the initial data we see from the frontrunners is likely to be limited.
And at best, that limited data, if positive, will result in very limited emergency use authorizations for specific groups, not full regulatory approval. That's simply not going to happen before 2021.
In the meantime, airlines continue burning through their reserves
Looking at the "good" news for airlines over the past month serves to remind us how important perspective is. Here are some of the notable headlines this month for airline stocks:
- Southwest Cash Burn Improves Again
- Delta Air Lines Says No Furloughs Coming Except for Pilots: Here's Why
- Airlines Report More Progress on Cash Burn
- Delta Raises Bond Sale to $9 Billion, Largest Debt Offering in Airline History
So, we have, "we're still burning cash," "we're laying off pilots and everyone else is getting their hours cut," "we're still burning cash, too," and "we just took out record debt because we're burning cash." This industry isn't in recovery.
As a group, airlines have added massive amounts of debt this year to cover their mounting losses:
And that's even with the industry getting significant financial support from the federal government. Only Southwest finished the second quarter with more cash than debt, and all have increased their debt by double-digit amounts this year.
The case for NV5 Global
While the airline industry remains a huge mess, NV5 is growing and profitable. In its second quarter ended June 29, revenue increased 29%, while adjusted earnings were $0.93 per share and operating cash flows came in at $50.7 million. Management immediately started using that cash to strengthen the balance sheet, paying off $17 million in debt soon after the quarter's end. This story runs entirely counter to what's going on with the cash-burning, recovery-uncertain airlines.
Enough about what's happening right now. Let's talk about the opportunity.
NV5 is a small, but fast-growing services provider across a wide group of vertical markets in the infrastructure, construction, utility, and geospatial markets. It is estimated that global infrastructure spending from 2007 to 2040 will be between $80 trillion and $94 trillion; a lot of that money will pay for concrete and steel, but the engineering, project management, compliance, and other services provided by NV5 and its competitors will generate trillions of dollars in revenues. With trailing-12-month revenue of $591 million, NV5 is a tiny player in this massive global industry.
It's also incredibly cheap. Due to some accounting quirks, its GAAP -- generally accepted accounting principles -- net income fell last quarter, resulting in a higher P/E ratio than investors have been willing to pay in recent years, even with the stock price still down over 20%. But on a cash flow basis, NV5 trades at by far its cheapest valuation ever:
The obvious winner
Eventually the airline industry will recover, and top airlines like Delta and Southwest (which I own) will make for compelling investments. But in the meantime, their financial situation worsens with each passing day, and that will result in a harder path forward as they burn through cash they won't have in order to pay down their growing debt loads. At the same time, NV5 is growing quickly, pumping out cash, and trading for a single-digit cash flow valuation that makes the stock cheaper than it's ever been.
It's not even close as to which is the better investment right now. NV5 is a great business trading for cheap, while airlines are still burning cash and loaded with risk. Invest accordingly.