US Airways Continues To Dive For No Reason

| About: American Airlines (AAL)

The stock market is funny sometimes. Many times, a company will rally for weeks or even months relentlessly for little to no reason, and many other times, a company's share price will dive week after week while the company is performing greatly as much as financials go. Currently, US Airways (LCC) is experiencing one of these plunges that carry no logic with it. Ever since the company announced record profits, the company's share price has been falling and from the looks of it, the bottom has yet to be reached.

US Airways' stock price is down nearly 30% since its peak in mid-July. This is disastrous as - financially speaking - the company is having one of the best times of its history. I wouldn't call this decline a correction either, because corrections usually result in price falls of 10-15%, not 30%. Obviously, something is amiss here.

As I mentioned in one of my past articles, investors of US Airways are too busy and too distracted with worrying about a possible merger with the bankrupt American Airlines (AAMRQ.PK) to enjoy the success of the company. As the company now enjoys a P/E ratio below 5 (and is expected to have a P/E ratio below 4 next year), the investors of the company only seem to care about whether American Airlines will end up merging with US Airways or not.

Obviously, merging with American Airlines would be great for US Airways, as it would result in a huge growth. If the merger happens, the resulting company will be one of the biggest airline companies in the world and it will offer a huge portfolio of routes and services. On the other hand, even if the merger doesn't materialize, this is not the end of the world for US Airways. Given the company's current and future earnings, the company is easily worth $20 per share even if it doesn't end up merging with American Airlines. Unfortunately, many of the company's investors fail to see that and they only see value in the merger.

In related news, the CEO of American Airlines Tom Horton has been quiet for a while now. A couple weeks ago, he was all over the place, making all kinds of announcements about how the merger was originally his idea, how US Airways was desperate and how he would be the one making the call on whether the merger will happen or not. All of a sudden, it all came to a stop and Mr. Horton hasn't made any announcements in the last couple weeks. I have a feeling that he was told to be quiet by the board of American Airlines as his announcements were counterproductive and they sounded like announcements of a desperate person who's getting cornered and running out of options. On July 27th, American Airlines sent non-disclosure documents to a number of companies including but not limited to US Airways. It looks like the investors of US Airways haven't been interpreting the silence since July 27th as a positive thing.

In much less related news, US Airways announced that it will start serving premium meals to its customers in the economy class for a price of $20. This is an interesting idea and I am sure that soon enough other airlines will follow US Airways in this practice. In the last several years, airline companies have had to get creative about generating additional revenues and their solution to tightening margins have usually been extra baggage fees. Now it seems like airlines will get more creative.

I will continue to hold my US Airways shares. My breakeven price is around $12, but I will try to reduce this price lower by selling covered calls until the stock price reaches my target price. For the company, analysts have target prices ranging from $14 and $21, which means even the most pessimistic analyst sees an upside potential of 40% on top of today's share price of $10. My target price is around $15 if the merger doesn't happen and $20 if it does happen.

Disclosure: I am long LCC.