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At least one airline is taking advantage of the short-squeeze craze, planning to use the high price of its shares to issue more shares.
American Airlines Group
(ticker: AAL) said at a securities depository on Friday that it plans to raise $ 1.1 billion in new equity issues. The operator’s shares soared this week, gaining more than 15% with the company preparing to disclose earnings on Thursday.
American is the airline’s best-selling stock, with about 25% of the outstanding shares held short. It seems to have gotten a boost with short-squeeze, a dynamic in which prices rise as traders who are sold (betting against a stock by borrowing and then selling shares) struggle to cover their losses by buying shares, fueling earnings from price.
At recent prices at around $ 17.40, American stocks are trading at their highest levels since last June. It is an increase of around 11% this year, but remains below more than 35% in the past 52 weeks.
American has issued 68.5 million shares since last October, at an average price of $ 12.87. The issue of an additional 64 million shares at an average price of US $ 17 would raise US $ 1.1 billion, diluting the outstanding shares by about 10%.
The fact that the American needs to raise so much capital is a sign that it expects a long way back to profitability. The operator burned $ 30 million a day in the fourth quarter, totaling nearly $ 2.8 billion over the three-month period. This is not likely to improve much in the short term. The airline said this week that it expects year-over-year sales to drop 60% to 65% in the first quarter, similar to fourth quarter revenues.
“Stubbornly high Covid-19 cases and stricter travel restrictions continued to restrict demand,” the airline said in a conference call. In fact, travel trends may worsen somewhat in the short term, as countries re-enforce travel bans due to new variants of the coronavirus.
Wall Street expects the company to reach financial equilibrium in 2022 and start reporting significant profits in 2023, predicted at $ 1.98 per share.
However, stocks are now trading well above analysts’ targets. In fact, the average target on the street is around $ 12 per share.
Citigroupin
Stephen Trent held a stock sale this week with a target of $ 15. Savanthi Syth from Raymond James reiterated his Underperform rating, although she does not set a target.
UBS analyst Myles Walton maintained a stock sale with a target of $ 10. He lowered his revenue estimates for 2021 and increased his operating loss forecasts to $ 5.7 billion from $ 4.5 billion this year.
“The rise of Reddit assuming some market shares came briefly to AAL and to assume that, if it returned, the company could find a particularly valuable window to recapitalize,” he wrote in a note on Friday morning.
JP Morgan’s Jamie Baker withdrew his target price on Thursday, although he estimates the stock is worth less than $ 5 per share, based in part on a multiple of seven times the 2022 profit of $ 1, 33 per share.
It is usually not a good sign for a stock when analysts are withdrawing their price targets. The issuance of more shares will help American overcome another difficult year, but it will not do any favors to investors who value the shares based on traditional measures, such as earnings per share. If Reddit’s rally cools, so will the stock.
Write to Daren Fonda at [email protected]