Credit Suisse cut its estimates and target on Continental (CAL) today on spiking fuel costs. While Continental will continue to lose money in the short term, CS is confident that it isn’t at risk of bankruptcy and can weather the current storm:
With crude at $150, CAL of course loses money in our model, but it is a carrier that is not at risk filing of a Ch. 11 filing – a contrarian view. The key for CAL (& others) is to build enough liquidity to survive until either: i) the industry can cut adequate capacity; or ii) the economy actually recovers someday (in say, 2 yrs).
The dreaded super spike, however, has forced CS to cut estimates:
Unrelenting spikes in crude, a source of unrelenting frustration for us, once again prompt earnings revisions. Now assuming a WTI equivalent of $145+$30 crack spread (vs prior $130+$25) in 2H08. 2Q loss goes to -$0.37 (from -$0.45); 3Q now -$1.90 (vs prior -$0.85); 4Q at -$4.00 (vs prior -$2.50); FY08 goes to -$7.12/share accordingly while 09E EPS falls to +$0.25 (vs prior $2.50).
Despite mounting costs, CS expects CAL to end 2009 with $2.7 billion of liquidity. CS therefore maintains its “Outperform” rating, though it lowers its price target from $20 to $15.