Bulls vs. Bears: Continental Airlines

Some analysts say the stock has bottomed out. Others believe it has a lot further to go.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Scott Cendrowski, reporter

The bull: Jim Corridore, Standard & Poor's
The bear: Hunter Keay, Stifel Nicolaus
When will the government come up with a plan to reform health care?
  • By the end of the year
  • By the end of Obama's term
  • It won't happen
CDs & Money Market
MMA 0.39%
$10K MMA 0.35%
6 month CD 0.37%
1 yr CD 0.68%
5 yr CD 1.37%

Find personalized rates:

Rates provided by Bankrate.com.

NEW YORK (Fortune) -- As the summer flying season begins, some analysts are getting bullish on airlines with healthy balance sheets like Continental Airlines. Jet fuel prices have declined by more than half from the same time last year -- when the company lost $585 million -- and some say the 51% drop in its stock this year is an overcorrection.

Other analysts think Continental (CAL, Fortune 500) shares might get cheaper: Rising summer oil prices could hit profits as a weak economy continues to cut into business travel, which makes up an estimated 60% of Continental's revenue.

Is now a good time to buy the stock, or should investors wait until there's more evidence of an economic recovery? We asked two airline analysts for the answer.

Bull: Jim Corridore, Standard and Poor's

"The best time to get into Continental and airline stocks is when things have already hit bottom, which is obviously impossible to forecast with certainty. But when you believe things are starting to bottom out, that's when these stocks are going to start to rally.

"We expect a bottoming out in travel demand in the upcoming third quarter. From here we should see improvement -- and we think that makes this an ideal time to get into these highly cyclical stocks. Add the fact that airline stocks tend to rally during the summer months because it's their seasonally strong period.

"In our view the worst-case scenario is already discounted into Continental's stock. Standard & Poor's is forecasting that GDP will bottom out here in the third quarter, and we'll start to see some growth in the fourth quarter. Air travel demand follows GDP growth. Investors will start to move back into these stocks.

"As long as we don't see a huge spike in oil from where we are right now, Continental can maintain profitability based on lower fuel costs and improving demand later in the year. I'm still expecting a sharp drop in jet fuel costs for them for 2009. But before oil came back I forecast fuel costs would be down 41% in 2009 after rising 47% in 2008. They lost $585 million in 2008; they can earn $130 million in 2009.

"A play on Continental is also a play on a recovery in business travel. It gets much more of its sales from business travelers, more than Northwest, Southwest (LUV, Fortune 500) or any U.S. carrier. If the U.S. economy starts to improve, we'll start to see business travel picking up. Those are much more profitable travelers, and the main reason why Continental is seeing a large drop in unit revenues is business travel.

"This stock is very volatile -- it has a beta of over three. That means it's three times as volatile as the overall market. These are not buy and hold stocks; these are stocks you have to keep a close eye on."

Bear: Hunter Keay, Stifel Nicolaus

"The deterioration of the economy has slowed, from unemployment claims to airline revenues and almost everything in between. But stabilization and recovery are two very different things and we are skeptical that we will have a meaningful recovery in the broader economy and the airline sector until next year.

"That means there's probably more downside to come and you might be able to buy Continental shares a little cheaper if you hold off for a few months.

"We like Continental on a long-term basis, but we're not buying many airlines on 2009 numbers because there's far too much uncertainty around travel demand for the rest of the year.

"If one values the stock on 2010 estimates, Continental is trading at a slight premium to the airline group average as measured by Enterprise Value to EBITDAR (which includes earnings before the cost of operating plane leases). It looks a little expensive relative to other airlines stocks that might carry less risk, like Delta (DAL, Fortune 500), which is our only buy rated airline stock right now.

"Now, Continental has historically generated EBITDAR margins in excess of group average because it has a larger share of business and international travel, which generate higher revenues. Unfortunately, business travel is the Achilles heel of this downturn -- it has declined in record proportions. Continental does not break out premium travel data, but business travel revenue for the industry was down about 35% to 40% in the first quarter, according to IATA.

"When you consider that business travel revenue make up about 60% of a typical network airline's revenue base, you get a feel for how painful the downturn has been on airline industry sales.

"Buying Continental is a waiting game: not only waiting for business travel to return, but waiting for some of its less-healthy competitors to go away. We don't see Continental as a bankruptcy risk -- it has a healthy $2.6 billion in unrestricted cash -- and if one or two or their competitors do go under, Continental will be in the driver's seat to gain market share.

"When the economy turns around again -- whether that's early 2010, late 2010, who knows for sure -- Continental will be in a great position to gain share and have levered pricing power because a good amount of capacity has been taken out.

"We have a favorable bias on Continental long-term, but we are waiting for the company to clear some near-term hurdles. We would consider buying shares on a pullback if the investor has the patience to wait out a longer-term thesis and an appetite for almost certain volatility in the interim." To top of page

Company Price Change % Change
Bank of America Corp... 16.15 0.00 0.00%
Facebook Inc 58.94 0.00 0.00%
General Electric Co 26.56 0.00 0.00%
Cisco Systems Inc 23.19 -0.02 -0.09%
Micron Technology In... 23.91 0.00 0.00%
Data as of Apr 17
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 10:42pm ET
More Galleries
50 years of the Ford Mustang Take a drive down memory lane with our favorite photos of the car through the years. More
Cool cars from the New York Auto Show These are some of the most interesting new models and concept vehicles from the Big Apple's car show. More
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.