British Airways – The Bullish case

So I looked at the bearish case, but why did I go long? -

1) Many competitors are going bankrupt – You dont have to be a genius to notice that lots of airlines have gone bankrupt this year. Indeed, all the transatlantic business class only airlines which were trying to compete with BA for its lucrative premium customers over the pond have now gone under and in all likelihood only a few mega carriers will remain in europe once the downturn has ended (BA/Iberia, KLM/Air france and Lufthansa plus ryanair and easyjet). I realise that the airline industry is a lousy industry in the long term but its also cyclical and due an upturn in fortunes for the potentially stronger survivors of the current downturn. Shares are close to pricing in worst case scenarios and, at the moment at least, the bankruptcy of BA doesnt seem likely.

2) BA is BA – Terminal 5 might have started as a disaster and did some harm to BA’s reputation (as has the attempts of certain documentaries on UK tv) but its slowly starting to show its potential and BA is still a very strong worldwide brand. Added to this there are the potential synergies of the Iberia merger as well as the alliance with American.

3) The stock seems fundamentally cheap – With a trailing P/E of about 4 (although admittedly the forward P/E looks like it’ll be much higher for a bit) and a NAV (net asset value) around 238p, BA looks very cheap. Devt levels seem managable (as does the deficit for the moment) with cash levels remaining constant at £1.8 billion pounds from March to the end of September. The company has also recently slightly upped its revenues estimates and maintained guidance for Augusts load factor suggesting things arent quite as bad as had been feared.

4) Fear and bearish levels are high (on the whole) – With the VIX/VXO (which measures market volatiility and fear) still in the high 60s, the investment sentiment reports (AAII and investors intelligence) close to contrarian buy signals, it seems that the market is poised for a medium term rally (although another sharp fall and new lows before this occurs also seems possible).  One caveat to this is the HNSI (which measures bullish sentiment of newsletter investment writers) which continues to suggest that market participants are too bullish or at least not bearish enough.

5) Oil is getting cheaper which will lower fuel costs – As BA commented from their recent results -

“Finance director Keith Williams said the airline had hedged 40 percent of its fuel in 2009/2010, meaning that if the oil price stayed at $75 a barrel and the dollar at 1.65 to the pound the group’s bill would be 2.8 billion pounds.”

Oil is now $57 a barrel.

So there are the two cases, ive obviously decided that the risk/reward very much favours being long right now, we’ll see how this trade plays out but the share price action since going long has been very much as hoped for with a higher price even though the markets are flirting with new lows.