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At least one airline is taking advantage of the short-squeeze mania and plans to use its high stock price to issue more shares.
American Airlines group
(ticker: AAL) said in a securities filing on Friday it plans to raise $ 1.1 billion in new equity issues. Shares of the carrier boomed this week, rising more than 15% as the company prepared to issue earnings on Thursday.
American is the most short-circuited share of airlines, with about 25% of the shares outstanding being short. It seems to have gotten a lift from a short squeeze, a dynamic where prices rise as traders who are short (betting against a stock by borrowing stock and then selling) try to cover their losses by buying stock, some price gains fuels.
With recent prices around $ 17.40, US stocks are trading at their highest level since June. It’s up about 11% this year, but remains more than 35% lower for the past 52 weeks.
American has issued 68.5 million shares at an average price of $ 12.87 since October last year. The issue of an additional 64 million shares at an average price of $ 17 would bring in $ 1.1 billion, diluting the shares outstanding by about 10%.
The American’s having to raise so much capital is a sign that he expects a long haul to profitability. The carrier burned $ 30 million a day in the fourth quarter, totaling nearly $ 2.8 billion over the three-month period. That probably won’t improve much in the short term. The airline said this week that it expects annual sales to fall 60% to 65% in the first quarter, similar to fourth quarter revenues.
“Stubbornly high Covid-19 cases and tougher travel restrictions continued to limit demand,” the airline said in a revenue call. Travel trends may even get a little worse in the short term as countries are resetting travel bans due to new variants of the coronavirus.
Wall Street expects the company to break even by 2022 and report meaningful earnings by 2023, estimated at $ 1.98 per share.
Still, the stock is now trading well above analyst targets. Indeed, the average street target is about $ 12 a share.
Citigroup‘s
Stephen Trent maintained a sale on the stock this week with a target of $ 15. Raymond James’ Savanthi Syth repeated her below-par assessment, although she does not set a target.
UBS analyst Myles Walton held a sale on the stock with a target of $ 10. He lowered his income estimates for 2021 and increased his business loss forecasts from $ 4.5 billion this year to $ 5.7 billion.
“The Reddit rally that took over some stocks in the market made its way briefly to AAL and we suspect that if it returns the company could find a particularly valuable window to recapitalize,” he wrote in a note Friday morning.
JP Morgan’s Jamie Baker retracted his price target on Thursday, although he estimates the stock to be worth less than $ 5 a share, based in part on a multiple of seven times its 2022 earnings of $ 1.33 a share.
It is usually not a good sign for a stock when analysts withdraw their price targets. Issuing more shares may put the American through another difficult year, but it will not do any favor to investors who value the stock by traditional measures such as earnings per share. If the Reddit rally cools down, so can the stock.
Write to Daren Fonda at [email protected]