Pack your bags! We're going to slam a stock.
Every week, I ground a stock that I think is about to hit some serious turbulence, but I come right back with three more picks that I think will be better portfolio replacements.
Who gets tossed out this week? Come on down, AMR
A picture trails a thousand words
The airline sector is flying high at the moment, and the parent company of American Airlines is going along for the ride. AMR's stock traded as much as 9% higher today, but investors shouldn't take this as a ringing endorsement of a very flawed air carrier.
"We have the highest labor costs in the airline industry," CEO Gerard Arpey told investors at its annual shareholder meeting last week. "It is challenging to compete when there is a wide gap between the pay and benefits you provide your people versus your competitors."
By Arpey's count, AMR's labor costs are $600 million higher than they would be at the other major carriers. His words may seem like a negotiating ploy in squeezing concessions out of its unions, but the company's red ink doesn't lie.
Let's go over a few of the other reasons to avoid AMR.
- The airline is still not profitable. Analysts see another loss this year. And this is not an industry thing. Several carriers, even some of AMR's legacy peers, are projected to land squarely in the black this year.
- AMR isn't trending favorably. It posted larger losses than analysts were expecting in each of the two previous quarters.
- Leverage cuts both ways, and AMR is feeling the pinch of its $11.4 billion in net debt position.
AMR isn't toast. Consumers seem to have no beef with the product, considering 7.1 million passengers boarded American flights last month. There also appears to be some near-term relief in fuel prices.
However, AMR's bloated cost structure is still going to make it the last kid picked. If its competition can be profitable at price points where AMR is not, this can't end well for the legacy carrier.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new replacements.
(NYSE: CAL): Now that Continental and UAL (Nasdaq: UAUA)are hooking up, the realized synergies should make the "united" company stronger. Unlike AMR, both legacy carriers were pegged to post profits this year before the deal was announced. AMR's Arpey incredulously sees the merger as beneficial to his company. He believes that labor costs will escalate at the combined carrier, but that seems to defy the long-term logic of a merger in the first place. Continental and UAL may very well cut capacity, but AMR will always be the slowest kid in this foot race.
(NYSE: LUV): I'm a fan of both Southwest and JetBlue (Nasdaq: JBLU), but I couldn't roll with the latter after it stunned analysts by posting a loss in its latest quarter after delivering five consecutive quarterly profits. Southwest has had its share of stumbles, but I believe that its "bags fly free" campaign is a real differentiator for passengers sick of seeing other carriers pile on new fees and charges. Analysts see Southwest's profit more than tripling to $0.68 a share this year, climbing to $0.88 a share in 2011. That's the trajectory that investors like to see.
(Nasdaq: LONG): I wanted a travel-portal play as my third replacement, but I can't go with former market darling Priceline.com (Nasdaq: PCLN), after the "name your own price" giant spooked analysts with weak near-term guidance. I'll go with eLong. This isn't China's biggest or even fastest-growing portal. However, it's attractively priced at this time. Revenue rose by 30% in its latest quarter, with net income nearly tripling. This is also a clean break from the highly leveraged carriers. eLong's balance sheet is top-heavy, with nearly $5.50 per American depositary share in cash and cash equivalents. That's essentially half of last night's close.
Sorry, AMR. Your takeoff appears to be interminably delayed.
Longtime Fool contributor Rick Munarriz always takes out the garbage. He owns no shares in any of the stocks in this column and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.