At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
JPMorgan and the fear of flying
Are airlines overpriced? Is it time to entertain -- if not actual fear of flying, exactly, then at least a healthy wariness of the sector? More and more, Wall Street analysts are starting to come to that conclusion.
Just this morning, the Wall Street wizards at JPMorgan expressed deep reservations about American airlines (in general), while their peers at Argus Research worried aloud over American Airlines (in particular.) But while Argus limited its reaction to downgrading AMR
JP downgraded US Airways
Why so chicken, JP?
What's got JPMorgan feeling so nervous? Basically, JP thinks airline management these days is all talk, no action: "It's one thing to preach supply discipline," muses JP, "another to actually demonstrate it." In other words, JP thinks there is still too much capacity in the airline biz -- capacity that saps pricing power, at a time when industry fuel costs are rising at the rate of "$9 billion annually."
According to JP, about the only airline really worth owning these days is Delta, which alone in the industry is making real moves to slow down the growth of its air fleet, cutting the rate of planned expansion in 2011 by roughly 40%. But is even that good enough?
Show me the money
Citing similar concerns to what JP has expressed, Deutsche Bank recently echoed its peer's endorsement, arguing that Delta is showing good "focus on free cash flow generation." In a recent Securities and Exchange Commission filing, Delta promised investors that its reduction in capacity growth will include a similar reduction in capital spending -- with the result that in 2011, the company intends to produce $1.8 billion in free cash flow.
And if that's the way things play out, then I have to say I'm inclined to agree with the analysts -- with one caveat. With a market cap currently flying just north of $9 billion, $1.8 billion FCF would be good enough to give Delta a five-times valuation. The only quibble I'd make is that, post-gobbling-up of Northwest, Delta has such a heavy debt load that its enterprise value to free cash flow ratio swells to 11.4.
To me, that's a steep price to pay for a company that even Delta's backers doubt will grow much faster than 3% per year over the next five years. In contrast, the stock I prefer in this industry -- and the one I own myself -- is Southwest.
Admittedly, at $8.8 billion market cap, but only $1.1 billion in trailing free cash flow, Southwest looks more expensive than Delta on the surface. The key differences here, though, are that:
- While not exactly tearing up the skies with its projected 6% growth rate, Southwest is still growing twice as fast as Delta.
- Unlike Delta, Southwest is managing to accomplish this without carrying a lick of net debt. To the contrary, Southwest's balance sheet shows $160 million net cash.
Call me crazy, call me a Fool -- but in this particular plane race, I think Southwest's the stock that'll deliver you to your retirement faster.
Southwest Airlines is a Motley Fool Stock Advisor pick, and Fool contributor Rich Smith owns shares of Southwest. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 706 out of more than 170,000 members. The Motley Fool has a disclosure policy.
Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.