Friday, November 04, 2005


From my point of view, the track record of JP MORGAN on airlines has been dismal. The firm liked DAL and NWAC at the worst of times, down-graded CAL to neutral while it was trading around $9 and now with the stock pushing $12 they like it again.

However, the point made in today's upgrade is a valid one. CAL and AMR are selling at a lower price today that before Katrina and the price of fuel is much lower today than it was at that time.

A bounce in the price of fuel could scare investors again. However, there is strong evidence that new supplies of oil are starting to take the lead over new demand for oil. Demand will grow in China, India and elsewhere for many years to come. However, both China and India have refineries under construction. Both countries are building GTL (Gas to Liquid) refineries. These refineries typically convert natural gas or even goal to liquid fuels (coal is heated until it gives off gas to be processed).

I have said it before but must say again that it is a rare opportunity to buy a stock at a .08 price to sales ratio. CAL was recently carrying $22 of debt for each dollar of equity. It clearly has the leverage to slip and fail or to make equity holders wealthy in a hurry. The company just sold $200 million shares worth of stock (about 20% of the company) at $11.35 per share. This move was disappointing but perhaps necessary. Company officers forecast an end of the year cash balance of $1.4 billion. Another few dollars of declines in oil prices and the $1.4 billion will take a jump. Profit projections for 2006 will also jump. JP MORGAN expects the company to be profitable in 2006. The swing down in the price of fuel could make that a big profit in 2006.