Lol honestly I’m close to fully invested. I have a lot of cash but if you net it with debt im looking at 3 percent.
If markets continue to fall I will be betting my house lol. The key for me is to have 50k until June, then I’ll be safe liquidity wise.
My real hope though is real estate falls and I can lever up on some distressed properties.
If market falls and say I lose my job. It’s going to be a big decision. My initial plan was the entrepreneurial path and finance it with my 401k. But I also have to start thinking of my future family and the safety of a job.
Anyways on the s&p multiple. It’s important to note that it is high because a huge chunk of it is the new tech companies. Something like 20 percent. That justifies higher multiples. And I agree that low rates prolly pushed up valuations. Tina will do that. But I don’t really buy that it justifies it.
The people who pushed stock prices to ridiculous levels by debt issuance and share buybacks are now paying for it as they are crushed by their debt.
BS are you not concerned that current Delta shareholders get wiped out in a restructuring as happened in ‘08-09?
There are comparisons as far as what’s happening to traffic (worse) and credit markets (better) to 2008/2009 but DAL in particular is unrecognizable vs then. They ENTERED 2007 as a B rated credit and the industry still hadn’t completed its consolidation in NA with newfound supply discipline.
I’m going to interpolate a few borrowed SS talking points with my own here and lay out the case as it stands in my mind. For starters, the new DAL is entering this crisis with a BBB- IG rating vs B HY rating in 2007. Prior to the wipe out it had been on POS outlook and was carrying good credit momentum with a conservative balance sheet and industry leading profitability. 2007 EBITDA margins were 12% in a boom environment. 2019 EBITDA margins were 22% in a steady as she goes environment. This is partly possible because of the market consolidation and discipline that has occurred since 2009 with North America forming 1/5 of global traffic and 2/3 of global profitability. Europe, where the bottom 35% of carriers lost money or broke even last year has already seen approximately 20 small time bankruptcies over the past few years is about to experience the mother of all shakeouts leading to a right sized market structure and Asia will be right on their heels, driving a nice setup coming out of this. Exacerbating things for foreign carriers is the fact that much of Europe still engages in fuel hedging with up to 90% of 2020 hedged so in addition to basically having no routes, those airlines are sitting on massive wrong way derivative bets, a practice NA airlines largely abandoned (with the exception of A rated LUV at ~60%, which is why I’m avoiding). Fuel for DAL is now a ~$2B tailwind offsetting approximately 15% of lost traffic in 2020 through cost savings.
So that’s the industry setup. Regarding DAL’s credit setup, leverage is around 1.8x debt to EBITDA vs >4x in 2007 with trailing FCF of $3.4B vs $300M in 2007. The firm maintains >$5B in liquidity of which $2.9B is in cash and unlike prior years and other high yield airlines (AAL/UAL), DAL has a largely unencumbered asset base meaning of the $20B in unencumbered assets, there is approximately $12B of unencumbered aircraft available to raise liquidity through sale/leaseback transactions or through EETC financing. This is a huge difference vs any prior period. For immediate actions they’ve eliminated $500M of CAPEX expenditures this year and are taking out approximately $1.8B in costs as a response on top of the $2B in fuel savings with the ability to delay aircraft deliveries if needed. The long and short of it is DAL looks positioned to weather this without government assistance and is the best positioned among the majors coming out of this. It’s difficult for me to rationalize DAL getting wiped out in any environment where congress is making any effort to avoid the disruption of entire industries collapsing.
Low rates absolutely drive multiples. You can look at this several ways.
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If you’re a DCF guy you simply look at the effect on WACC calculations. Low rates obviously decrease nominal WACC while the suppression of asset volatility through monetary policies like QE deflates beta and lowers risk premiums. However the main factor is the simple effect of lower treasury rates as the base in WACC. This obviously inflates NPV’s, just following simple math.
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The other way of looking at is from a multiple guy’s perspective of relative value. Assets compete across asset classes for capital. People are constantly allocating through the capital stack, we do it here. If you’re saying hypothetically ok, I can get 1% on a 10Y treasury or 2.5% in the barclays agg, a 5% earnings yield or 3% dividend yield seem attractive from an asset allocation perspective. It’s only exacerbated for foreign investors from the Japanese and Euro markets. The point here is the equity market doesn’t exist in isolation so low rates change what the market will pay. To the extent low rates are a structural norm (EUR/JP/ now US?) that becomes the new norm.
I agree with the tina argument. That is what pushed up multiples. I am saying it doesn’t justify it from a wacc perspective. Consider you are paying 25x multiple because rates were at 0 percent. The price you paid would be fair assuming rates remained constant or lower. But interest rates are fluid And should rates move up then you overpaid.
Also the amount of debt these companies should be a lower or due to the risk. Especially since earnings are now expected to fall.
Yeah, I mean if you disagree with how structural the low rates are then that’s fair. Personally I think it’s here to stay for demographic reasons but lack a crystal ball so to each their own on that one. I also think that there will be a rethinking of optimal debt levels after this is said and done among management teams, so that will likely change. By and large firms were actually becoming more credit friendly through 2019 but I think this puts things into a clearer focus. Firms love to de-risk after the risk event, haha.
Without any knowledge of the airline industry, the analysis on Delta appears solid BS. Playing devil’s advocate here though, let’s say Delta gets downgraded to HY (very real possibility) and there is a gvmnt-mandated air travel shut down for 1-3 months. Can Delta survive on $0 revenue for 1-3 months? Not sure issuing LT bonds would even be an option at that point. To survive, either the gvmnt would have to bail them out or a private investor (Buffet) would bail them out with extremely favorable/likely equity-dilutive terms.
On the topic of low interest rates… the problem is it’s essentially pulling forward returns. Lower discount rate = higher PV of future cash flows (i.e. higher valuations). Once that is reflected in the price, the cagr to the FV is obviously lower…
Yeah, I think Delta is the best positioned of the bunch and can weather a 1-3 month shutdown on existing liquidity options (sale leaseback, EETC’s, revolver, cash) and the fact that maybe 50% of the costs are variable. I do hear that the airline portion of the current stimulus package is government guarantees and financing but no grants. In my mind, that sets AAL up for a long term bankruptcy given their starting leverage position and puts DAL and UAL about on equal footing. The closer you get to 3 month shutdown, the more value is destroyed at airlines as they’ll spend years deleveraging, but inside that time frame I think they survive.
I would think LUV had the best odds of survivability for the airlines.
This. Southwest or gtfo.
Although they better make my status right when this is all over.
LMAO, LUV or GTFO? Do you even invest brah?
You’re missing the point. DAL is on nearly equal credit footing. LUV has 60% of 2020 fuel hedged at $50 a barrel and a third of 2021. DAL has 0%. Assuming both survive, which is in my mind a statement of fact, which would you rather own from a profitability standpoint? Which one benefits from a restructured Euro market and distressed Asian carriers delaying or outright bailing on deliveries of new capacity? It’s such a no-brainer I can’t believe I had to spell it out twice.
Delta air lines just cut to junk by S&P.
Your point? Nobody claimed the Baa3/BBB-/BBB- firm on negative review for DG in the biggest wipeout was going to hold IG.
I invest in companies I like. I travel a ton. DAL is a horrible company. LUV is a great company. That’s the extent of my analysis.
i’m just looking at the debt levels. dal has a ridiculous amount relative to its cash level 17b to 2b. while luv has enough cash to pay it off if it wanted. 4b to 4b.
They will manage the liquidity through revolvers. You really have to look at when that debt is due right? No question LUV has better credit profile, the rating tells you that and nobody is arguing with it. But the question is that DAL has enough liquidity (my take: yes), at which point that ceases to matter and you start looking at exit value as an equity holder.
no doubt dal is the best performer i nthe last 10 years. but hard to say if they got the cash to survive like everybody else. we really need q2 to get a clearer picture. in any case, they will definitely be bailed out. but hard to say how much equity holders will be punished.
Do you guys recommend buying leveraged ETFs like SSO, QQQ, QLD, etc?
After recession of 2008, S&P 500 recovered 64% after a year and 84% after 2 years.
The structural low rates are a point, but US market always find the way to recover. If we are short-term horizon investors, we could make great gains.
Today the market recovered, most indexes recovered 2%-20% (peak). My question is (stupid question) that if leveraged ETFs can drop to zero even if the underlying asset will never be like S&P 500 or Nasdaq.
Will appreciate the comments.
Yeah, nobody knows for sure how the corona situation plays out. But my base case just reflect my best guess, from what I’m hearing here in MA, things are looking more positive than feared.
It’s worth pointing out that anybody who bough DAL on Friday after my post at 2pm is up over 30%.