Coronavirus Beaten Down Stocks/Funds Series - U.S. Global Jets ETF

Summary

• The US Global Jets ETF is at an all-time low, down 63% from its peak and 58% YTD.
• The airline industry has been smashed due to COVID-19. Most airlines are just surviving with limited flights. Government support is helping.
• The US Global Jets ETF is mostly a recovery play on the US airlines sector. It is currently trading with a PE of -1.85 and a dividend yield of 2.92%.
• I do much more than just articles at Trend Investing: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

This article first appeared on Trend Investing on May 7, 2020; therefore all data is as of that date.

In this 'coronavirus beaten down stocks/funds' series of articles, I look at both stocks and funds that have been beaten down due to the COVID-19 (coronavirus) market sell-off and are near or below their 5-year low, are very well valued, and have potential to rebound strongly as we recover.

Today I look at the US Global Jets ETF (NYSEARCA:JETS). Due to COVID-19, the US and global airline industry has been devastated. In many cases, airlines have been shut down, or reduced to running essential/emergency services to bring home expats, etc. Reports in April suggest that US airline travel is down 95% and US travel demand is down 95% YoY. This has led to massive job losses, jobs on hold, and perhaps some airline bankruptcies.

However, USD 25 billion of US government support until end September 2020 for US airlines, as well as COVID-19 restrictions easing, should help the airlines start to recover later this year. Many will still suffer significant losses in 2020 despite government bailouts and will likely build up their debt burden.

For investors it will be safer to play the sector via a fund than an individual airline stock; but remember the massive fall in the sector may take some time to recover and there will likely be casualties along the way.

US Global Jets ETF (JETS) - Price = USD 12.71

As shown on the charts below, the JETS ETF is bouncing along the bottom near the all-time low. The fund is down 63% from its peak and down 58% YTD. The fund began in April 2015 at ~USD 25 per share.

US Global Jets ETF

Source: Bloomberg

Source: Yahoo Finance

A look at the airlines/aviation sector and the coronavirus impact

Airline ticket sales have been severely impacted by COVID-19 with estimates of around an 80-90% loss of ticket sales. Some airlines have been forced to close while most currently operate on a very limited capacity.

To offset the horrendous loss of ticket sales, airlines have grounded planes, reduced or cut services, and drastically reduced staff. Despite this H1 2020 losses will still be significant due to fixed costs such as airline leasing costs, etc. In many cases government support has lessened the burden on the sector.

The only near comparable event was the shorter-term closure of flights following the 9/11 attacks. You can read about this and the subsequent recovery in the article: "Coronavirus Lessons From 9/11: Airlines." Another report states that after 9/11 and during the GFC, US flight capacity fell 15-30%, and the industry took 12-18 months to recover.

The COVID-19 impact on the sector has been much deeper, and there still remains considerable uncertainty about when passengers will return to flying. My views on this are later in the article.

In March 2020, it was reported that the International Air Transport Association [IATA] predicts that "airlines around the world will need as much as $200 billion in government assistance to survive." A Forbes report states:

Given the global nature of the COVID-19 pandemic that threatens to throw many economies into recession — including the world’s biggest, the US — it could take passenger air travel demand anywhere from several months to two years to recover to 2019 levels.

Government support to the airline sector

In April, the US Government announced a USD 2 trillion coronavirus rescue package. The package included a $25 billion rescue package for US airlines. The federal grants and loans require airlines not to lay off or cut pay rates of workers through Sept. 30, 2020.

An April 15, 2020 Reuters report stated:

Major carriers will receive 70% of the funds for payroll in cash assistance that will not need to be paid back, while smaller carriers receiving $100 million or less will not need to repay any funds. The six largest U.S. airlines - American Airlines Group Inc, United Airlines Holdings Inc, Delta Air Lines Inc, Southwest Airlines Co, JetBlue Airways Corp and Alaska Airlines - as well as four other airlines accepted the support, Treasury said.

The US Global Jets ETF details

The U.S. Global Jets ETF provides investors access to the global airline industry, including airline operators and manufacturers from all over the world.

ETF.com gives a good description:

JETS invests in companies within the airline industry, which spans passenger airlines, manufacturers, airports and terminal services. Small-, mid- and large-cap companies are included from both the US and internationally. The fund puts about 70% of its weight in US large-cap passenger airlines (at quarterly rebalance) with a tiered weighting scheme driven mostly by market cap as well as passenger load. It populates the rest of the portfolio with companies in supporting industries from the inside and outside the US, chosen by fundamental factors such as gross margins, sales growth and sales yield.

Top ten holdings

Source: ETFs.com

You can view all the holdings here.

Some brief details on the top 4 holdings

• Southwest Airlines Co. (LUV) is a major American airline headquartered in Dallas, Texas, and is the world's largest low-cost carrier. As of 2018, Southwest carries the most domestic passengers of any United States airline. The airline has scheduled services to 101 destinations in the United States and ten additional countries.
• American Airlines Inc. (AAL) is a major American airline headquartered in Fort Worth, Texas, within the Dallas–Fort Worth metroplex. It is the world's largest airline when measured by fleet size, scheduled passengers carried, and revenue passenger mile. American, together with its regional partners, operates an extensive international and domestic network with almost 6,800 flights per day to nearly 350 destinations in more than 50 countries.
• Delta Air Lines Inc. (DAL) typically referred to as Delta, is one of the major airlines of the United States and a legacy carrier. It is headquartered in Atlanta, Georgia. The airline, along with its subsidiaries and regional affiliates, including Delta Connection, operates over 5,400 flights daily and serves 325 destinations in 52 countries on six continents.
• United Airlines Inc. (UAL) is a major American airline headquartered at Willis Tower in Chicago, Illinois. United operates a large domestic and international route network spanning cities large and small across the United States and all six continents. Measured by fleet size and number of routes, it is the third largest airline in the world.

Source for all: Wikipedia

Breakdown by country and sectors of the JETS fund

As shown below US stocks dominate the fund holdings at 81.31% share. European stocks (12.9%) are the next most dominant. Airlines (86.4%) dominate the sector holdings, followed by air freight & courier services (5.48%), and aerospace & defense (4.96%).

Source

Valuation

The US Global Jets ETF is currently trading with a PE of -1.85 and a dividend yield of 2.92%. The JETS fund Price/Book ratio is 0.92.

Note: MarketWatch has the PE at 6.18, and the dividend yield at 3.08%.

The fund has an expense ratio of 0.60%, and an average spread of 0.20%. Liquidity for the past month is ok, with a daily average volume of 2.67m shares.

Given the unprecedented degree of disruption to the sector valuation is difficult. If we were to assume airlines can recover quickly (by end Sept. 2020) to 2019 earnings levels then the JETS ETF is very undervalued. Of course the earnings recover story may take 2 years or more.

Risks

• COVID-19. The longer the pandemic disrupts economies and border closures continue, the airlines sector risk remains high. Many countries' borders remain closed due to COVID-19. This should gradually improve in 2020; however the timing will depend on governments and on the course of COVID-19. Domestic travel is expected to open up first.
• Public attitude to flying again - Some people will remain scared to fly for fear of catching COVID-19. Airlines are addressing this in many cases making face masks compulsory.
• Passenger loads may need to be reduced to accommodate social distancing. This reduces profitability for airlines.
• Bankruptcy risk - Airlines have suffered significant losses due to COVID-19. In many cases, there has been government support. The US$25b US government support is due to end by end Sept. 2020, so there is the funding risk beyond that if US airlines are still struggling.
• Liquidity risk - Some airlines or airport services companies may not have ample liquidity to survive.
• Industry costs - Storing and maintaining planes while idle is a cost. Insurance costs may go up. Conversely lower current oil prices are a significant boost to airlines, as fuel can sometimes make up as much as 50% of expenses.
• Timing risk. When will the sector start to recover?
• Management and currency risk. The JETS fund is in USD. About 80% of the fund is currently made of US stocks.
• Stock market risks - Liquidity, premium or discount to net asset value [NAV], sentiment.
• Market sentiment - COVID-19 (Coronavirus) has been causing global lockdowns and economic disruption, which in turn has lowered investor sentiment.

COVID-19 daily new cases in the USA has flatlined and may soon decline

Many airlines are starting to make face masks compulsory

ABC7.com reported:

Delta Air Lines, United Airlines and JetBlue will start requiring passengers to wear masks as the airline industry struggles to stay afloat during the coronavirus pandemic. American Airlines, Southwest Airlines and Spirit Airlines will make wearing masks mandatory on May 11..... Many airlines say if passengers forget to bring a mask, one will be provided.....All major U.S. airlines are disinfecting passenger cabins and have stopped booking all or most middle seats.

A flight attendant wearing a face mask and gloves

Source

Further reading

• Coronavirus: Major airlines start requiring passengers to wear face masks on flights
• Alaska Air: reports first quarter 2020 results; COVID-19 response
• Major U.S. airlines accept government aid for payrolls; American and Alaska also seeking loans
• Trump says the country must reopen and get the economy going
• Warren Buffett says Berkshire sold all its airline stocks because of the coronavirus (the timing of the sale is not mentioned)
• May 4, 2020: Buyers appear to be ‘calling the bottom’ in the JETS airline ETF, market analyst says

US Global Investors is the JETS fund manager. You can view more details of the JETS fund here.

The global airline sector has been smashed by COVID-19 coronavirus causing planes to sit idle

Source

Conclusion

Without doubt, the COVID-19 hit to the airline and associated industries has been unprecedented causing revenues and profits to collapse. Some airlines are already in trouble or going into liquidation (E.g.: Virgin Australia). This is why the JETS fund is down 58% YTD (63% from its peak). The flip side is that many airlines have government support, and in the US the government has contributed $25b to support the sector until the end of Sept. 2020.

Valuation is hard to determine given the unpredictability of future earnings and duration of the COVID-19 disruption; however, should the airline sector recover reasonably quickly then the current near all-time low price will look cheap.

For risk-tolerant investors considering an investment in the JETS fund the question is: 'When will the sector start to recover?' Given US airlines dominate the JETS fund, the recovery of US airlines is paramount to the success of the fund. Given the US is starting to reopen their economies state by state, my current view is the sector will slowly and steadily improve from here in 2020, provided we don't go back into full lockdowns. I think domestic flying will recover before international. I expect to see a full sector recovery within 2 years, as it took 12-18 months to recover after 9/11 and the GFC. This assumes that COVID-19 is brought under control in 2020.

Risk remains with the coronavirus and the degree and length of global economic disruption ahead. There are also considerable risks around airlines surviving, and if and when passengers will return to flying. Overall the risk equation is somewhat similar to that of the cruise line industry's current dilemma. Risk is reduced due to the cheaper current fund price, the US government airline support package, and by investing in an ETF rather than a single stock.

I rate the US Global Jets ETF as a speculative buy for risk-tolerant investors with a 2-5+ year time frame.

As usual, all comments are welcome.

Analyst’s Disclosure: I am/we are long JETS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information in this article is general in nature and should not be relied upon as personal financial advice.