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At least one airline is taking advantage of the short-squeeze mania, planning to use its high stock price to issue more capital.
American Airlines Group
(ticker: AAL) said on Friday in a securities depository that it intends to raise $ 1.1 billion in new equity issues. The carrier’s stock took off this week, gaining more than 15% as the company prepared to issue gains on Thursday.
The American is the strongest short-stock of the airline, with about 25% of the shares in circulation. It seems to have gotten up from a short pressure, a dynamic in which prices rise while traders who are short (bet on a stock by borrowing and then selling shares) struggle to cover their losses by buying shares, fueling price gains.
At recent prices around $ 17.40, US stocks are trading at their highest levels since June last year. It has risen by about 11% this year, but has fallen by more than 35% in the last 52 weeks.
The American issued 68.5 million shares in October last year, at an average price of $ 12.87. The issuance of another 64 million shares at an average price of $ 17 would generate $ 1.1 billion, diluting the remaining shares by about 10%.
The fact that the American has to raise so much capital is a sign that he expects to return to profitability. The carrier burned $ 30 million a day in the fourth quarter, totaling nearly $ 2.8 billion over three months. This is not likely to improve much in the short term. The airline said this week that it expects year-on-year sales to fall 60% to 65% in the first quarter, similar to fourth-quarter revenue.
“Covid-19 cases with high stubbornness and stricter travel restrictions continued to restrict demand,” the airline said in a earnings call. Indeed, travel trends may actually worsen in the short term, as countries re-impose travel bans due to new variants of coronavirus.
Wall Street expects the company to reach parity in 2022 and start reporting significant gains in 2023, forecast at $ 1.98 per share.
However, the stock is now trading well above analysts’ targets. Indeed, the average target on the street is about $ 12 per share.
Citigroup‘s
Stephen Trent held a stock sale this week with a $ 15 target. Savanthi Syth, from Raymond James, reiterated his Underperform rating, although he does not set a target.
UBS analyst Myles Walton maintained a stock sale with a target of $ 10. It cut its revenue estimates in 2021 and raised its forecast for operating losses to $ 5.7 billion from $ 4.5 billion this year.
“The Reddit Rally, which has taken some market share, has found its way to AAL shortly, and we assume that if it returns, the company could find a particularly valuable window for recapitalization,” he wrote in a note Friday morning.
JP Morgan’s Jamie Baker withdrew his price target on Thursday, though he estimates the stock is worth less than $ 5 a share, based in part on a 20-fold 2022 multiple gain of $ 1.33 a share.
Usually, it is not a good sign for an action when analysts withdraw their price targets. The issuance of equity will help Americans get through another difficult year, but will do no favors to investors who value equities on traditional measures, such as earnings per share. If the Reddit rally cools down, so does the stock.
Write to Daren Fonda at [email protected]