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Following AMR’s Chapter 11 bankruptcy filing yesterday, we are suspending our rating and our target price on the equity. Our most recent rating was Underperform. Please see our note dated November 30, 2011 (emailed out November 29, 2011) for detailed thoughts on AMR’s bankruptcy filing.
One root in our recent TREE analysis (a cleaner ROE metric) is companies’ capital allocation decision and the degree to which companies return capital to shareholders. This report is our quarterly analysis of corporate share repurchase activity. We focus on actual share repurchase activity as we’ve found this to be more predictive historically than announced share repurchases. To that end, over the last 7 quarters, cumulative U.S. company share repurchases have been $704 billion, or 4.9% of the average market capitalization. We find 66% of the top 50 repurchasing companies trading at a P/E below the 2012 overall U.S. market P/E of 11.3x. This report also includes deep value ideas supported by attractive dividend yields.
Neither the filing itself nor the timing were major surprises to us given AMR’s worsening cash burn profile and the lack of recent progress on labor negotiations. AMR has few, if any, attractive assets to collateralize a DIP loan, in our view, leaving the company’s unrestricted cash balance of $4.1B as its primary source of funding for restructuring. Given the likelihood of continuing cash burn throughout the course of the Chapter 11 process (particularly considering AMR now plans on “accelerating its fleet renewal strategy), the need for a DIP loan at some point down the road should still be considered as a potential outcome, in our view.
This 82-page report analyzes the responses from nearly 140 traffic managers that filled out our fourth-quarter survey during October and early November. Within the report, we discuss in detail: pricing, volume, service and capacity trends across all modes of freight transportation. The report looks at inventory restocking trends and how they are currently driving reported freight volumes compared to the broader economy. Our report also reveals a clear dichotomy between TL capacity and pricing compared with LTL.
Welcome to our Friday Freight report. We distribute this product each Friday mid-day, so clients have some freight reading material to make their weekends truly worthwhile! We always appreciate your feedback if you have any suggestions. Have a great weekend! This weekly report presents the most recent views we are hearing from industry insiders and summarizes the research of Wolfe Trahan. Included are (1) key takeaways, selected shipper comments; (2) notices of upcoming industry events; (3) key takeaways from some of our notes from the past week; (4) recent stock performance for our transport universe; (5) updated comparison tables for the airfreight & logistics group, railroads, and trucking; and (6) fuel trends for West Texas Crude Oil, On highway diesel, Rail diesel, and Jet fuel.
Total Week 46 Rail vols increased 1.7% y/y, slightly decelerated from +1.8% and +3.1% the past 2 weeks. While y/y vols have been positive for 7 straight weeks to begin 4Q, growth has moderated the past several weeks into slowing industrial-related vols and a negative inflection in coal vols this week. Still, vols are tracking up 2.4% QTD, improved from +0.7% during 3Q. U.S. rail vols are up 2.6% QTD, ahead of Canadian vols up 1.2%. Looking out to next week, the rails face a normal comp with Thanksgiving in the current and year-ago weeks.
In this Friday Flyer we discuss our thoughts on AMR’s current situation, slot swap results, an interview with UAL’s CEO, alarming bag fee lesislation, ATA data, the NMB’s response to DAL’s election results, and much more.
Despite near-term weakness in Europe, Brazil and India, we believe global truck production is in the middle innings of the cycle, and Meritor is highly focused on trucks after shedding light vehicle operations in recent years. Though Meritor should benefit from Outperform-rated Dana’s recent leadership on North American truck axle pricing, we rate it Peer Perform as it is more exposed than Dana to content risk from upcoming truck fuel economy regulations, and it is hesitant to raise pricing. While we have conviction in the truck production cycle, we cannot say the same for the company’s execution at this point, but we have a positive bias towards the stock after its recent sharp pullback as we do not see material liquidity risk.
We received many questions after a policy analyst at another firm indicated a federal judge was likely to certify a class action lawsuit against the major U.S. rails regarding their fuel surcharge programs. We had written about this issue back in April when we thought class certification was likely back then. After speaking with several lawyers yesterday, it seems likely that the judge will certify the class in the near future, possibly as soon as Friday.
Evaluating Banks’ Earnings Quality. This is our inaugural report on U.S. banks’ earnings quality. We use a combination of 16 metrics to objectively evaluate and score the “Q3 2011 bank earnings/asset quality of 73 banks with a market capitalization greater than $750 million. We use metrics, such as tax rate changes, M&A earnings accretion, loan/security yields, and loan delinquencies. Overall, we found that earnings quality improved in “Q3 2011 as compared with prior quarters.
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