Pfizer‘s Nov. 9 announcement that it’s making progress toward a COVID-19 vaccine caused markets to rally, with beaten down sectors including airlines, industrials, and retailers leading the way higher.
It’s way too soon to declare the pandemic over, but hopefully with a vaccine on its way, we are at least near the beginning of the end. The market’s initial reaction suggests Wall Street thinks so, with work-from-home stocks getting hit hard and life-as-it-was stocks rebounding.
For investors, the challenge now is to figure out which stocks that moved higher on Monday have what it takes to continue to push higher in the months to come. Here’s why we think AerCap Holdings (NYSE:AER), General Motors (NYSE:GM), and Boeing (NYSE:BA) still have room to run even after a big jump earlier in the week.
The best way to invest in an airline recovery
Shares of AerCap, which buys planes and leases them back to airline customers, jumped more than 20% on Nov. 9. Aircraft lessors, by their nature, take on a lot of debt and have been perceived to be at risk of default during the pandemic, but those concerns are overblown.
It’s true AerCap has had to defer nearly half a billion in lease payments this year for customers facing financial difficulty, and the company in the third quarter took a $973 million non-cash charge to reflect the falling value of its portfolio of more than 1,000 aircraft. But AerCap ended the quarter with $11 billion in total liquidity and $25 billion in unencumbered assets available to borrow against should things get worse.
AerCap does have $30 billion in debt, but only a $2 billion revolver comes due before 2023.
Of course, it’s possible airlines will need fewer planes in the coming years than they’ve wanted in the past. More than 60% of AerCap’s fleet are newer-technology, more fuel-efficient aircraft, the types of planes that should be easier to place if they are returned by a struggling customer. And the company’s average current lease expires in 2028, with only 7% of the company’s aircraft by book value scheduled to come off of lease through the end of 2022. That puts limits on the return risk through the worst of the crisis.
Even if the worst is over for airlines, they’ll still need years to get healthy. And they will likely buy very few new planes while they recover. But any added revenue coming in makes it less likely aircraft lessors will see additional deferral requests, and with airlines ill-positioned to buy new planes, they will likely lean on leasing companies to expand their fleets.
AerCap, even after the jump, is still down 40% for the year and remains the single best way to invest in an eventual aviation recovery.
Why GM — yes, GM — is primed to grow amid the recovery
John Rosevear (General Motors): GM wasn’t the biggest gainer after the vaccine news was released; it jumped 9.6% from Monday morning through Tuesday. But it’s a company that stands to reap big benefits as the pandemic recedes.
Like most automakers, GM’s worldwide sales were hit hard by the pandemic, falling 23.4% in the second quarter. But its sales were down just 4% in the third quarter, and its profits boomed, rising sharply from the third quarter of 2019 on much-improved cost controls and strong demand for its trucks and SUVs, which drove strong prices.
The fourth quarter probably won’t be quite as strong, but that third-quarter result told us a lot about where GM is now: CEO Mary Barra has brought costs under control, and GM’s new products are selling well without big incentives.
That’s a good reason to own GM over the next couple of quarters. But there are reasons to hold it for much longer, namely that Barra is using the fat cash flow from those trucks and SUVs to fund big investments in electric vehicles and self-driving technology.
Its $110,000 electric GMC Hummer got a lot of attention — not all of it complimentary. But the thing to know is that GM has quite a few more electric vehicles on the way, most of which will be at lower price points. All will share the next-generation Ultium battery and motor technology powering the new Hummer, and all will be profitable right away, Barra promises.
All of that is good news and should drive above-market growth for the stock over the next few years. But there’s one more thing: Until it had to close its factories amid the pandemic earlier this year, GM paid a good dividend. It’s on hold for now, but the company said recently that it could come back in the first half of 2021 if the recovery continues.
Long story short: GM is primed for growth in the near term and over time as the world transitions to electric vehicles. For a patient investor who will reinvest the dividend once it returns, GM stock looks like a good bet to beat the market over the next few years.
Patience is a virtue with Boeing stock
Rich Smith (Boeing): Shares of Boeing, one of only two truly international airplane-manufacturing stocks in existence, closed trading last week below $158 a share. But then Monday happened. Pfizer announced its big vaccine news, and Boeing stock shot up nearly 14% in a day.
Happy day! Time to sell, you say, take some profits, and never look back at Boeing again?
Hardly. Even after Monday’s windfall profit, and the additional gains Boeing stock has racked up since, the stock still trades for literally just half what it cost a year ago, down 50% in 52 weeks. Just a recovery to pre-pandemic prices, therefore, holds the potential to deliver a clean double to new investors in Boeing stock.
Now…how long might that take to happen?
There’s no denying Boeing has problems. The company’s space program dropped the ball last year and now distantly lags rival SpaceX in manned spaceflight. Closer to Earth, Boeing’s troubled 737 MAX airliner still hasn’t been cleared by the FAA to resume flying (although that clearance may come as early as next week). And of course, there’s the pandemic, which has devastated demand for air travel in general and specifically, demand for new airplanes.
Still, most airline CEOs seem to agree that air travel demand will begin recovering next year, and things could be back to “normal” come 2022 or thereabouts. Of course, a vaccine will make that more likely. Analysts who track Boeing stock seem to agree with this assessment and predict Boeing will follow a similar schedule, returning to profitability ($3.45 per share in earnings) next year, then growing that to $8.28 in 2022, $10.86 in 2023, and $14.05 in 2024.
Fourteen dollars a share is a bit better than what Boeing earned in 2017, by the way, a year that ended with Boeing stock above $300 in share price. At the outside, therefore, I think investors can probably expect to see Boeing trading back at pre-pandemic levels — about twice what it costs today — roughly four years from now.
Divide 100% by four years, and my hunch is investors can expect roughly 25% annual profits if they’re brave enough to buy Boeing stock today.