CAL

[David Randolph]

This is a similar play as AMR, just to fill up some more of the portfolio with airlines, an industry I expect to continue outperforming in 2007.

I'll add CAL to the 3 Stocks on Fire Portfolio, 6.66% of capital as always, at a price not higher than $44.48 (yesterday's high).

Here are some technical and fundamental tests:

1. Profile

Continental Airlines, Inc. (CAL), an air carrier, engages in transporting passengers, cargo, and mail in the United States. (complete profile here)

2. Technical Analysis
2.1. All History Chart



CAL is coming back after the 2001 - 2002 debacle. I could have bought there, at $5. What am I saying, If I could have, I would have, period.

2.2. Medium Term Chart



The medium term trend is clearly bullish. CAL is up 118% in 2006 so far.

2.3. Short Term Chart



I don't know if CAL will just continue to push higher in the short term or not, but it looks like it will. The trend is positive. Of course, there can be a pullback, but I believe that 3 months from now CAL will be higher than today.

3. Fundamental Analysis
3.1. Number of Shares Outstanding



We have this increase in the number of shares outstanding in 2006, but it was all in the beginning of the year and the company has been aggressively buying back shares since then.

The current market cap is 90,103,298*$44.38 = $4 B.

3.2. Balance Sheet



I like to see what's the book value of the airlines, it seems to be a better metric than the current ratio. The book value of CAL is roaring back and I expect it to be about 1.4 B by the end of 2007. When CAL had this book value in 1998 it was a $65 stock.

3.3. Revenues



I think that 07 estimate for revenues is conservative, it will probably beat that $13.85 B number. Revenues for 06 are expected to come in at $13.18 B, rising from $11.21 B in 05 (17.5% revenue increase).

The Price to Sales Ratio is $4 B/ $13.18 B = 0.3. The industry average is 0.36. This looks cheap.

3.4. Profits



After some years of steep losses, CAL will probably come back to its fat profits of more than $5 a share. Since revenues are much higher now, after total restructure, it may even do $10 EPS in 2 or 3 years down the road. Then CAL would be a $130 or so stock.

The current forward EPS multiple is $44.38/$5.39 = 8.23. This is attractive.

4. General Overview

I've been a bull and will probably remain a bull in the airline sector going forward. CAL is outperforming one of the strongest industry's in 2006.

This way, with AMR and CAL, I'll have about 14% of capital exposed to the airline industry. I feel much better this way.

And I'm studying and thinking of adding a possible rocket to this mix, we shall see. Again:

Trading Plan:

Buy CAL today below $44.48.

[David Randolph]

Since the trading plan was:

Buy CAL today below $44.48.

[/b] I was a bit afraid of not being able to get in today, because the stock opened gap up at $44.61.

But suddenly the stock dipped on the intraday, I got in at $44.40 ... and it fell down to a low of $43.67. Nice comeback by the close though, already showing a profit of 1.28%.

You can see I'm out of words today, especially after rickjust told me you're on holydays

I hope you all have a nice day with your families I'll join mine now.

[David Randolph]

With people concerned with higher oil prices, the airlines continue to climb. Airline ticket prices were up 11.5% on the June 05 - June 06 period to a new all time high:

Second-Quarter 2006 Air Travel Price Index (ATPI); Air Fare Index Reaches Highest Level in 11-Year Measurement;

Oil prices are roughly the same they were a year ago:



As I see it, if oil goes up airline ticket prices will rise even more, because airlines do have pricing power.

I'll continue to hold CAL.

[David Randolph]

Ouch, that was one big one day sell off for CAL, down 7.3%

But, if we look at it in perspective, that is, using a chart, it wasn't a big deal. The trend continues to be up, the stock just corrected a bit.

There's support on the $41.7 area, yesterday's low was $41.73. I don't think the breakaway gap on the chart, at $38.61 - $39.24 will be closed soon. I rather expect CAL to close at a new high above $45.41 anytime soon.

I'll continue holding CAL.

[David Randolph]

CAL was down heavy during the session, but recovered some to close with a 1.35% decline. The candlestick left on the chart was a doji, so bears were afraid and undecided. Bulls were kind of attracted by the lower prices.

I don't think the gap between $38.61 and $39.24 will be closed, because it was a breakaway gap. The same thing as I said with AMR, CAL will probably close the year above $46.

I'll continue holding the stock.

[David Randolph]

I'm losing 6.42% on CAL and earning 6.3% on AMR. I wonder if I shouldn't replace CAL for another airline with more upside potential. AMR looks better than CAL here, but they are two of the largest ones outthere. Perhaps a smaller company will grow more in the favorable environment for airlines that I've been talking about on this and the AMR threads.

But I'm not going to sell CAL for a loss, since the 3 Stocks on Fire Portfolio still has 26.74% in cash. I may buy another airline today or tomorrow and will take a small profit in CAL when I have it.

For now, I'll just continue holding the stock.

[David Randolph]

CAL is hurting the portfolio a bit and I still didn't find another airline to buy (been checking MESA, but problems there - also need to review the NWACQ.PK play).

Anyway, I'm not thinking of selling CAL at a loss ... since I believe the stock will rebound to new highs shortly after hitting support.

[David Randolph]

Good news on Friday:

- Continental Pilots OK Service to China

And after the close: Continental Airlines Reports November 2006 Operational Performance

Look at the demand growth:

«For the year to date, traffic increased 12.1 percent to 82.03 billion revenue passenger miles from 73.2 billion revenue passenger miles. Capacity grew 9.6 percent to 101.51 billion available seat miles from 92.61 billion available seat miles, and occupancy improved to 80.8 percent from 79 percent.»

Technically the chart shows support at $38.88 (ascending trendline)/$38.61 (close of the gap)/$38.3 (horizontal support) and $35.56 (50 days SMA). I expect the stock to bounce from these support levels - it may not even touch them - and rise above the $45.41 high before the end of 2006.

I'll continue holding CAL.

[David Randolph]

Analysts started barking on November's numbers as you can read here:

«The traffic growth was weaker than expected, according to Credit Suisse analysts, who cut their fourth-quarter earnings estimate for Continental to 15 cents a share from 50 cents a share.»

«The culprit, according to Credit Suisse, was regional flying at Continental partner ExpressJet and "some lingering weakness" on trans-Atlantic routes. JetBlue Airways Corp.'s discount fares from New York's John F. Kennedy International Airport also appeared to hurt Continental's November performance.»

«Other analysts joined in cutting fourth-quarter earnings forecasts for Continental, sending shares down in early trade before they turned positive to close up 3.8% at $41.81.»

«"The stock has appreciated 42% since the beginning of the quarter on strong fundamentals and investor excitement about potential industry consolidation," wrote Morgan Stanley analyst William Greene in a note to clients. "The stock is a little ahead of itself."»

I think the bold highlights say it all. Analysts say results were bad, and yet the stock closes up 3.77% on the day. What does that tell you?

It tells me CAL will move higher from current levels. I'm glad we're recouping losses on this one, nobody likes losses. Will keep on holding CAL, expecting to see $46 before year's end.

[David Randolph]

Airlines release a lot of press releases, don't they? I think it is because they use them to promote their services for investors. Today CAL released two:

- Continental Airlines Introduces New Check-In Web Site for American Express Business Travel Clients

- Continental Converts Boeing Orders

I see 2007 EPS estimates being upgraded on the quite:



Technically today's session was a non-event. I'll continue holding the stock, and still didn't find a better airline to own.

[David Randolph]

Nice to see CAL up 1% after those downgrades. I have nothing further to add, I'll continue holding CAL.

[David Randolph]

Another small day without any news for CAL. Losing 5.3% on this one, but can't find a better airline to buy, and I want to have two of them, so I'll continue with CAL.

[David Randolph]

CAL is attractive enough, but now I know I should have bought NWACQ.PK instead, since that stock rose 48% on Friday.

NWACQ.PK has a lot of potential, but the risk is also enormous, it all depends on the way the company gets out of bankruptcy, that is, will common shares continue to represent the company's value or will they lose all their value and new shares will be issued?

I don't know the answer to this question.

But, for example on UAUA's case, old common shares lost all their value and new ones started trading in February 2006.

There was a research piece a while back that said if NWACQ.PK was to be bought, common shares would be taken out of the market at around $5. Perhaps that's what is fueling the speculation on that stock, but since it already closed at $4.9 on Friday, the risk reward doesn't seem compelling now.

I have to continue holding CAL, as I believe it is the second most attractive airline in terms of risk/reward currently trading in the market.

[David Randolph]

Hey, what a pleasant development, CAL rose 8.2% yesterday and it is now on the gainers list of the 3 Stocks on Fire portfolio.

Things are going even better than I thought, because it seems the rumour outthere in the market is that CAL is about to merge with NWACQ !

UPDATE 1-Continental shares rise 8 pct on merger talk

Another rumour is that CAL is about to merge with UAL Corp:

Continental firing sector's gains on merger talk

Airlines want to buy airlines and investor's want that too, because everybody is starting to experience a demand surge for air travel.

CAL just needs one more step and close above November's intraday high of $45.41 ... well, it just did that, since yesterday it closed at $45.42. I guess I'm going to be right when I said:

It tells me CAL will move higher from current levels. I'm glad we're recouping losses on this one, nobody likes losses. Will keep on holding CAL, expecting to see $46 before year's end.

I wish CAL merges with NWACQ, that way I don't have to be sorry I didn't buy Northwest instead (my company will do it for me, giving me the best of both worlds, low risk and high profit potential). I own the two most attractive airline stocks outthere, which are AMR and CAL, I'll continue doing that, as the sector is on fire

[David Randolph]

Let us forget about yesterday's update, alright? I mean it, it is a bit of shame Because I deviated from my initial reasoning for the trade and started considering merger rumors and stuff like that.

My initial analysis said "buy CAL" because it was trading at fairly attractive forward multiples. Revenue and net income was growing on a quarter by quarter basis and 2007 estimates looked very promising.

But, today, CAL came out with some estimates for the 4th quarter that really fell short of analysts (and my) expectations. The numbers they're talking about tell me that probably they'll show a loss in 4Q, instead of the $0.22 average EPS estimate:

Continental Airlines Shares Sink on 4Q Guidance, Analyst Estimate Cuts

I think CAL's shares will be weak over the next several weeks, maybe months. But my biggest worry is 2007, as they're giving too much money to their employees pension plan ($300 M instead of the $180 M initially expected), and perhaps I overestimated the demand growth, as bookings for the next 6 weeks are flat in comparison to 2005 levels.

I guess analysts will probably start cutting their estimates for 2007 of $5.69 EPS, and those numbers were the fundamental basis of my trade.

Therefore I'll sell CAL tomorrow at the open.