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Adam Levine-Weinberg  

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  • Should Nordstrom Split Into Two? [View article]
    Two things:

    First, the distinction that Nordstrom is high-end and Nordstrom Rack is low-end is not as clear-cut as you describe. There are plenty of people who shop at both. And there are plenty of things at Nordstrom that are cheaper than other items at Nordstrom Rack. The difference is in the experience -- full-line stores are high-touch, and off-price stores are not. I don't think customers are confused about the difference.

    Second, sales rose only 11% last quarter. If the online business returns to 30% growth in the future, the stock will rise well above your target without having to split the business.
    Nov 23, 2015. 12:08 AM | Likes Like |Link to Comment
  • Boeing: Are Low Oil Prices Providing A Tailwind To The 777 Instead Of The 787? (Part 2) [View article]
    This is an interesting analysis, but you are unrealistically expecting that United (or any other airline) can get the same yield with 30% more seats. If that were true, airlines would always exclusively fly the biggest versions of each airplane.

    A more realistic assumption would be that the estimated 30% increase in seating capacity on the 777-300ER drives 15%-20% more revenue than the 787-9. It would be interesting to see how that impacts the analysis.
    Oct 15, 2015. 05:52 PM | Likes Like |Link to Comment
  • Delta Should Buy Hawaiian Airlines, Not Alaska Airlines [View article]
    It's all in the report you provided. Vancouver-Asia traffic is currently about 60% higher than Seattle-Asia. On the other hand, Anchorage doesn't have any flights to Asia and hasn't in a very long time. Flights to Asia out of Anchorage were something that only occurred when typical airplane ranges were shorter, necessitating more for intercontinental travel.

    That said, I don't think Vancouver and Seattle compete that much, despite being pretty close together. (Significant extra costs/hassle to connect in Canada rather than connecting in the U.S.) Sea-Tac is mainly competing with the two bigger Asian gateways on the U.S. West Coast: SFO and LAX, while Vancouver is mainly serving traffic to/from Canada.
    Aug 11, 2015. 08:19 AM | 1 Like Like |Link to Comment
  • Delta Should Buy Hawaiian Airlines, Not Alaska Airlines [View article]
    I agree with SunnyinPDX: there's no point to Delta acquiring Hawaiian Airlines. (It seems extremely unlikely that it would acquire Alaska Airlines either, due to the price as well as the virtual certainty that DOJ and DOT would sue.)

    Honolulu is a great destination but a terrible hub. Just for example, Portland-Seattle-Tokyo is about 4900 miles; Portland-Honolulu-Tokyo is about 6400 miles. It only makes sense to go through Honolulu to Australia and New Zealand, which is a very limited market. Probably 90%-95% of the traffic on Hawaiian Airlines' flights to Asia consists of tourists coming over from Asia to Hawaii.

    So all a merger would do is replace one brand that has a very strong following for flights to Hawaii with another brand that is very well respected generally but has no special appeal for flights to/within Hawaii. And there would be no meaningful synergies.
    Aug 8, 2015. 03:23 PM | 2 Likes Like |Link to Comment
  • American Airlines Group: The Market's Most Hated Stock? [View article]
    I think we are basically on the same page. What I was originally trying to state was that analysts' estimates in various databases are based on accounting earnings, not cash earnings. As a result, the 2016 estimates for AAL are not all comparable to one another, because some analysts appear to be assuming no taxes while others are building in a normal tax rate for accounting purposes in their estimates. Everybody agrees that the cash tax rate is effectively zero in 2016.

    By January we will find out whether management is reversing the valuation allowance, and I'd expect the analysts' estimates to move closer to one another at that point.
    Jul 30, 2015. 04:24 PM | Likes Like |Link to Comment
  • American Airlines Group: The Market's Most Hated Stock? [View article]
    @markcc: That's not how the accounting works. There is a big gap between when an airline reverses its valuation allowance and starts booking taxes in its earnings statements and when it actually starts paying cash taxes to Uncle Sam. For example, Delta reversed its valuation allowance at the end of 2013 based on its profit trends, but it hasn't paid cash taxes yet and isn't likely to pay until 2017 or 2018, even at current profitability. US Airways started booking taxes during 2013 even though it wasn't paying any cash taxes, and then it stopped after the merger with American because it added a whole new pile of losses.

    The key point here is that it is relatively straightforward to calculate when an airline might start paying cash taxes based on how large its net operating loss position is. (Even then, it's not as simple as it seems, because if you're buying a lot of planes you can defer quite a bit of tax with accelerated depreciation.) But it's even more complicated to determine when to start booking taxes. As I stated before, I think AA will probably start booking taxes next year. However, considering its existing NOLs and how much it's spending on CapEx, it won't be paying cash taxes for a few more years.
    Jul 30, 2015. 02:06 PM | 1 Like Like |Link to Comment
  • American Airlines Group: The Market's Most Hated Stock? [View article]
    @markcc: Analysts have taken a variety of approaches in accounting for the tax benefit. Many of them just focus on the cash impact, which won't be felt until later than the accounting impact.

    On the accounting side, there's a significant subjective component to deciding when to reverse a tax valuation allowance and start accruing taxes again. I am pretty sure that some analysts' models assume that is going to occur for 2016, while others won't factor that into their EPS estimates until American Airlines confirms that it is reversing the valuation allowance. Otherwise, it's hard to understand why there's a more than 100% spread between the lowest and highest analyst estimates for 2016. ($4.40 and $9.06, according to Yahoo Finance.) I think they're just comparing apples and oranges.

    My point was just that if you're basing a valuation off of forward earnings estimates, it's important to recognize that the estimates aren't all treating the tax issue the same way.
    Jul 27, 2015. 03:55 PM | 1 Like Like |Link to Comment
  • American Airlines Group: The Market's Most Hated Stock? [View article]
    I agree that AAL is undervalued. To those who say that you can't fight the market, it's all a matter of your mindset and time horizon. If your goal is to make a big profit in the next few months, then sure, you can't fight the market. But if you're willing to wait a few years to get rewarded, of course you can fight the market. And meanwhile, AAL is helping with its big buyback program.

    There was a time not that long ago when most airline stocks were trading for 4X earnings. Sometimes, it seemed like that was just all that investors were willing to pay for airline stocks and you couldn't "fight the market". That was true until it wasn't true anymore... and then all the airlines skyrocketed. Personally, I'd rather own the stocks if I believe in their long-term potential over attempting to time the market.

    One technical point: I'm not sure how reliable the forward earnings numbers are because of American's tax situation. Right now, the company still isn't accruing any taxes, but it may start accruing taxes for accounting purposes in 2016 (and almost certainly by 2017). That would cause an immediate 35%-40% hit to EPS, all else equal. The cash impact wouldn't come until a few years later, though, mainly because of accelerated depreciation on all of AAL's jet purchases.
    Jul 26, 2015. 11:08 PM | 2 Likes Like |Link to Comment
  • JetBlue: $37 Fair Value Heading Into Earnings, But Revenues Should Miss [View article]
    This article has (shockingly) ignored the fact that JetBlue has already reported preliminary unit revenue statistics for each month of the quarter.

    With JetBlue's unit revenue up 4% in April, up 1% in May, and down 1% in June, it's already clear that unit revenue will be up for the full quarter, probably by 1% or a smidge more. Capacity also grew about 7.5%. Put that together and you have high single-digit revenue growth, roughly in-line with the analyst consensus. Which is not surprising, since all of the relevant data has already been reported in preliminary form.

    The more interesting question will be what happens in Q3. Most of the airlines reporting recently have offered up pretty weak unit revenue guidance for the summer. I think JetBlue will outperform again, but it may not be able to keep unit revenue above the flat line.
    Jul 23, 2015. 06:14 PM | 2 Likes Like |Link to Comment
  • Will Hawaiian Holdings Fly Higher After Earnings? [View article]
    @upatnite2: I guess what I'm saying is that there is a difference between the stock price plummeting and the stock price plummeting for a reason. Based on the price action from the past few days (which was basically driven by the news that HA's margins will "only" expand by a few points this year rather than 8-10 points like many were hoping), I don't think anything terrible would have to happen to HA for the price to keep falling in the short term. (I don't expect it to keep falling, but ultimately I have no idea what will happen in the short run and don't really care.)

    If HA stock falls for no good reason in the short term, that benefits long-term shareholders insofar as the company uses the opportunity to retire convertible debt and/or warrants. Obviously, if something really bad happened to the company from a fundamental perspective, that would be a different story. Even that can be overstated, though.

    For example, a spike in oil prices might send airline stocks tumbling. But these companies have shown in the past couple of years that they can make plenty of money at high fuel prices. And oil has demonstrated in the past 6 months that any price move is temporary and could change on a dime depending on the supply-demand balance and market psychology.
    Feb 4, 2015. 08:40 AM | Likes Like |Link to Comment
  • Will Hawaiian Holdings Fly Higher After Earnings? [View article]
    @upatnite2: The dilution from the convertible notes and warrants increases as the stock rises. The convertible notes are hedged, although I confess that I don't quite understand what happens with those hedges (essentially call options on the stock) as HA starts to buy back convertible debt. One key point, though, is that the hedges offset the dilution from the convertible notes but that impact isn't included in the ongoing diluted share count. When everything settles next year, the hedges should at the very least offset the convertible notes.

    As for the warrants, the strike price is $10. So at $10, there's no dilution. At $15, with net share settlement, only 3.6 million shares get issued. But at $20, 5.5 million shares would be issued; at $30, 7.3 million shares get issued. So if the HA stock price trends lower, the diluted share count growth will reverse. Additionally, I am hoping that HA takes advantage of the lower share price to more aggressively repurchase convertible debt at favorable prices. For long-term shareholders, it actually might be a good thing for the stock to pull back in the short run.

    One other thing: HA does have some extra cash, but it would be dangerous to run the airline with less than $300-$400 million of cash given the volatility of the airline business and significant planned CapEx towards the end of the decade.
    Feb 2, 2015. 11:48 AM | 1 Like Like |Link to Comment
  • Will Hawaiian Holdings Fly Higher After Earnings? [View article]
    I think you all are too focused on the short-term. Hawaiian faced a similar situation in late 2012 with weakening foreign currencies (particularly the yen) and overcapacity to the West Coast -- and at that time it didn't have the benefit of cheaper fuel. The stock "plummeted" from $7 down to the low $5 range by April 2013. Then it quintupled in less than 2 years.

    In other words, this too shall pass. Airlines will re-adjust capacity if routes to Hawaii are performing significantly below the rest of their networks. And when Hawaiiian Airlines gets its A321neos starting in 2017, it will have more of an ability to tweak its own capacity to the West Coast based on demand. In the meantime, HA is still projecting earnings growth/margin expansion in 2015, and it now trades at just 12-13 times trailing earnings.

    Also, HA's fuel hedging losses really aren't that big. It's projected full-year fuel cost is only $0.20 higher than American Airlines' un-hedged projection. So it's probably capturing 80% or more of the drop in oil prices.

    @Dothemathman: You're right that HA is more leveraged than many of its competitors. But its leverage is really quite manageable, and with the company's projected free cash flow for 2015-2016, it should be able to significantly reduce its debt burden in the next 2 years.
    Jan 31, 2015. 03:27 PM | Likes Like |Link to Comment
  • Virgin America: How Not To Update The Market [View article]
    I live on the East Coast, so I can't say I've seen this first-hand, but it seems to me like Virgin America has a very devoted following in San Francisco, and to a lesser extent in LA. United is the only competitor there with real scale (maybe Southwest if you include all the Bay Area airports). Virgin America is much more tech savvy than either of those airlines, which is really important there -- United is still finishing up Wi-Fi installations this year. The first class hard product is also better than anything else offered in the U.S., outside the JFK-SFO/JFK-LAX routes.

    In terms of award redemption, Virgin America has partnerships with several other airlines, so you can use Elevate points to get to popular destinations like Hawaii, London, Australia, Tokyo, Hong Kong, etc. Still far from global, but you're not limited to the continental U.S.

    As for competition, I think Virgin America is being smart by focusing its energy on transcontinental routes and routes to slot/gate constrained airports. For the most part, it's avoiding the short/medium haul routes where competitors like Southwest and Spirit thrive. And the Virgin America amenities (extra space, better IFE, mood lighting, etc.) are more valuable on longer flights.
    Jan 25, 2015. 11:52 AM | Likes Like |Link to Comment
  • Virgin America: How Not To Update The Market [View article]
    @markcc: Virgin America is definitely planning for growth. As you probably know, there are 10 planes coming between the middle of this year and the middle of next year. That's already about 19% growth, assuming that utilization stays flat in the long run. Beyond that, the company plans to grow by leasing A320s (or possibly buying through a small incremental Airbus order) until its A320neos start arriving in 2020. With Airbus churning out 500+ A320 series planes a year, it won't be that hard to find 15-20 extra planes in the 2017-2019 timeframe if the business environment remains solid.

    I do agree that there is substantial buyout potential, and I think JetBlue is the main candidate. I don't expect a deal to happen for a few years, though -- both airlines have other fish to fry. A premium shouldn't be a problem, even if VA is fairly valued on a standalone basis. There would be huge merger synergies: on the revenue side you can bring in a lot of new business by combining a strong East Coast airline with a strong West Coast airline, and on the cost side you can eliminate a lot of overhead, consolidate airport operations, etc.

    Jan 23, 2015. 10:30 PM | 2 Likes Like |Link to Comment
  • Virgin America: How Not To Update The Market [View article]
    I don't think the fuel price discrepancy should have been that much of a surprise to the market. In Q3, Virgin America's economic fuel expense was $3.13/gallon vs. $2.87/gallon for Delta, so the gap between the two is essentially unchanged. Delta had about 10-11 cents of benefit from refinery profits in Q4 which is obviously something that Virgin America didn't have. The rest of the difference is probably a combination of hedging philosophy (Virgin America will probably have bigger hedging losses in Q1/Q2 but then much less in the second half of the year) and some systematic differences in fuel costs based on the airports they serve.

    Obviously, it's a bummer that there will be big hedging losses in Q1, and to a lesser extent in Q2. Fortunately, that has no bearing on the long-term value of the company.

    I don't think there would have been much point in Virgin America guiding to Q3 and Q4 fuel costs. It totally depends on where oil prices will be then, and that's anybody's guess!

    Jan 23, 2015. 05:24 PM | 2 Likes Like |Link to Comment