AMR is not the only U.S. company to declare Chapter 11 recently. Eastman Kodak did as well. But Kodak’s reasons are different. It wants to buy time, financially, to auction off patents, which may or may not be valuable. Kodak may cut few if any workers in the process. AMR, on the other hand, wants to salvage its wreck while leaving behind the parts most damaged.

Several things will happened to AMR in bankruptcy court, or have happened already. A judge probably will elect to destroy one small part of the U.S. economy while he opens the door for the building another part. The destruction is assured; the risk of the rebuilding is small. The court system will pervert what the free markets would have handed AMR and a potential buyer. The buyer, in normal circumstances, would have had to accept AMR’s liabilities with its assets, as well as the future that those liabilities and assets might bring. Such a buyout of AMR would have required brilliant management willing to take a long risk for a possible substantial reward. In bankruptcy, though, a buyer will get easy access to a business from which even mediocre management can profit. Bankruptcy will make AMR a post turnaround company — one of the best targets a buyer can buy.

What a bankruptcy court will not do is force a new AMR owner to compensate the people and suppliers whose losses will make AMR viable. Delta or US Air will make money on AMR, probably instantly. The bankruptcy system does not make the acquirer pay for that profitability through some compensation of those people and companies that made the sacrifices that benefit the acquirer.

The Chapter 11 system has allowed AMR to be what it was not before — a perfectly successful company made perfect by those who will get nothing for the transformation that caused the perfection.

Douglas A. McIntyre

The unofficial closing bells put the DJIA up more than 83 points to 12,758.85 (0.66%), the NASDAQ rose nearly 32 points (1.14%) to 2,818.31, and the S&P 500 rose 0.87% or more than 11 points to 1,326.06.

There were several analyst upgrades and downgrades today, including Goldman Sachs Group Inc. (NYSE: GS) cut to ‘neutral’ at JPMorgan; Starbucks Corp. (NASDAQ: SBUX) raised to ‘outperform’ at Oppenheimer; Oracle Corp. (NASDAQ: ORCL) cut to ‘neutral’ at Macquarie; and Regions Financial (NYSE: RF) raised to ‘outperform’ at RBC Capital and cut to ‘neutral’ at BofA/Merrill Lynch. Znyga Inc. (NASDAQ: ZNGA) gets starting calls from four brokers: ‘overweight’ at Barclays and JPMorgan; ‘buy’ at Goldman Sachs; and ‘neutral’ at BofA/Merrill Lynch.

Earnings reports since markets closed on last night have led to some price changes as of the last half hour of trading today: Apple is up 6.4% at $447.17, after posting a new 52-week high this morning of $454.45; Advanced Micro Devices Inc. (NYSE: AMD) is up nearly 3% at $6.72; Altera Corp. (NASDAQ: ALTR) is up 1% at $40.54; Yahoo! Inc. (NASDAQ: YHOO) is down -0.6% at $15.60; ConocoPhillips (NYSE: COP) is down -0.9% at $70.01; Praxair Inc. (NYSE: PX) is down -2.8% at $106.05; Wellpoint Inc. (NYSE: WLP) is down -4.9% at $66.01; US Airways Group Inc. (NYSE: LCC) is up more than 18% at $7.59; and Xerox Corp. (NYSE: XRX) is down nearly -10% at $7.81.

Other standouts from today include the following stocks:

Illumina Inc. (NASDAQ: ILMN) is up more than 46% at $55.16. The genetic testing instrument maker is the target of a $5.7 billion hostile takeover offer from Roche Holdings AG.

Rubicon Technologies Inc. (NASDAQ: RBCN) is down nearly -12% at $10.66. The LED lighting maker was downgraded from ‘buy’ to ‘hold’ at Needham yesterday on low demand.

Indiana Community Bancorp (NASDAQ: INCB) is up about 44% at $20.90 after posting a new 52-week high of $21.34 earlier. The bank holding company has agreed to be acquired by Old National Bancorp (NYSE: ONB) in an all-stock transaction.

Complete Genomics Inc. (NASDAQ: GNOM) is up 19% to $2.98. The DNA-sequencing company is getting a boost from the hostile takeover bid for Illumina.

NuVasive Inc. (NASDAQ: NUVA) is up about 19% at $16.31. The medical device maker had its shares stopped today following a report that it would not receive an injunction against selling a disputed product.

Stay tuned for Thursday. We have noted the following events on the schedule (all times Eastern):

• 8:30 a.m. – Durable goods orders
• 8:30 a.m. – New claims for unemployment benefits
• 10:00 a.m. – New home sales
• 10:30 a.m. – EIA weekly natural gas storage report
• 4:30 p.m. – Fed balance sheet and money supply reports

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Paul Ausick

In the past few days, firings have neared a recent peak among some of the largest companies in the U.S. One troubling sign is that the layoffs are happening across a wide number of industries. The “downsizings” could be a coincidence, or they may be a signal that growth has slowed in several sectors of the economy.

Novartis (NYSE: NVS), the drug giant, said it will fire 1,960 people in the U.S. New product introductions have slowed. Some current products have sales difficulties. But part of the problem is that revenue is off and the company does not see that recovering enough soon.

Layoffs at U.S. financial firms may reach as high as 60,000 this year. Most recently, RBS (NYSE: RBS) said it will cut 3,000 people. Many more cuts may be in the offing. Apparently the government has asked Bank of America (NYSE: BAC) to set a plan to pull out of a number of markets across the U.S. That cannot be done effectively without personnel cuts.

AMR, the parent of American Airlines, may be bought out by Delta (NYSE: DAL) or US Air (NYSE: LCC). News reports say that a deal will remain on hold as AMR eliminates a number of jobs while in Chapter 11, so that the costs to run the airline are lower.

Delhaize said it will shutter 113 of its Food Lion stores and cut 4,900 jobs in the U.S. In the general retail sector, Sears Holdings (NASDAQ: SHLD) is in the midst of closing 100 stores, and the layoffs done in the process will number in the thousands.

The press has reported that layoffs are imminent at Yahoo! (NASDAQ: YHOO) and Microsoft (NASDAQ: MSFT) as each tries to control margins while revenue growth slows.

And public sector firings continue, as well. More than 1,500 people on the Oakland, Calif., payroll have been “let go.”

Once again, all of this news could be a coincidence — thousands and thousand of people just got unlucky at the same time. That really is not the case, though. Most of the companies and public employers that have cut people, or are about to, are in financial trouble arising from problems linked to the economy.

Douglas A. McIntyre

President Obama to ask for a $1.2 trillion increase in the national debt ceiling. (Reuters)

China’s foreign currency reserves drop to $3.18 trillion, a sign that exports have slowed enough to change monetary policy. (Reuters)

Novartis (NYSE: NVS) will cut 2,000 jobs in the U.S. (Reuters)

Apple (NASDAQ: AAPL) stops iPhone sales in China when crowds become unruly. (Reuters)

Several buyers, including Delta (NYSE: DAL) and US Air (NYSE: LCC), may approach American Airlines parent AMR about a buyout. (Reuters)

Yields fall at Italy and Spain debt sales. (Reuters)

Research In Motion (NASDAQ: RIMM) may have retained Goldman Sachs (NYSE: GS) to look at strategic alternatives. (Reuters)

The Fed may force Bank of America (NYSE: BAC) to leave a number of businesses and some areas of the country. (WSJ)

Goldman Sachs approaches federal officials about buying the troubled bond portfolio of AIG (NYSE: AIG). (WSJ)

A strategic review of PepsiCo (NYSE: PEP) by its board likely will not prompt the firing of its CEO, Indra Nooyi. (WSJ)

China sets new rules to make it easier for foreign investors to put capital into the country. (WSJ)

A Wynn Resorts (NASDAQ: WYNN) shareholder files suit about a possible donation the company made to a university in Macau. (WSJ)

Low retail sales raise concerns about the pace of the recovery. (WSJ)

An agency of the U.S. government pressures AMR to keep its pension plans intact. (WSJ)

Eurozone factory output drops in November, based on year-over-year numbers. (WSJ)

The government probes potentially illegal financial activities at Diamond Foods (NASDAQ: DMND). (WSJ)

Several lenders to Sears Holdings’ (NASDAQ: SHLD) suppliers want faster payments to those suppliers. (WSJ)

BMW and Mercedes increase production in the U.S. (WSJ)

Peugeot would like to form a broad alliance with another car company. (WSJ)

International bond investors largely believe a deal on Greek debt will be done, but not on the terms Greece expects. (WSJ)

China may invest some of its foreign reserves in stocks to get better returns. (WSJ)

Corn prices fall on new, higher estimates of U.S. production. (WSJ)

Members of the 2006 Fed did not anticipate the housing collapse. (NYT)

CVS Caremark (NYSE: CVS) pays $5 million for charging too much for some drugs. (NYT)

Target (NYSE: TGT) will set up small Apple stores inside its retail locations. (NYT)

The creditworthiness of U.S. companies fell over the past 30 years, according to S&P. (FT)

Google (NASDAQ: GOOG) and LG discuss a new TV project. (Bloomberg)

Eastman Kodak (NYSE: EK) approaches Citigroup (NYSE: C) for capital it might use as part of a bankruptcy. (Bloomberg)

Douglas A. McIntyre

Congress reaches a tentative deal to keep the government open. (Reuters)

Bill Gross’s PIMCO Total Return Fund continues to do poorly. (Reuters)

The maker of Angry Birds may have its IPO in Hong Kong. (Reuters)

Deutsche Bank (NYSE: DB) will begin the sale of its asset management business. (Reuters)

Research In Motion (NASDAQ: RIMM) delays its QNX system until 2012, an unexpected development. (Reuters)

Apple (NASDAQ: AAPL) struggles to gain market share in China. (Reuters)

Salesforce.com (NYSE: CRM) enters the HR software industry. (Reuters)

Sony (NYSE: SNE) will launch its Vita device. (WSJ)

Battelle Memorial Institute reports that R&D spending should increase next year. (WSJ)

The International Monetary Fund’s Lagarde says all major nations must help Europe. (WSJ)

United, Delta (NYSE: DAL)  and US Airways (NYSE: LCC) begin to challenge Southwest (NYSE: LUV) at the low end of the price market. (WSJ)

The CEO of the New York Times Company (NYSE: NYT) departs. (WSJ)

Investors in Sino-Forest ask the CEO to leave. (WSJ)

Facebook will release new software to make it easier for advertisers to use the social network. (WSJ)

MF Global’s Jon Corzine says he knew about fund transfers to Europe. (WSJ)

Japanese regulators again attack Citigroup (NYSE: C) over its mutual fund sales. (WSJ)

Property prices in Asia fall quickly. (WSJ)

Morgan Stanley (NYSE: MS) cuts 1,600 jobs. (WSJ)

Some retailers will have “Super Saturday” before Christmas. (NYT)

Kinder Morgan (NYSE: KMI) to bet its $21 billion buyout of El Paso Corp. (NYSE: EP) will give it a chance to enter the booming natural gas market. (NYT)

Russia may invest $20 billion in an EU bailout, with the money moving through the IMF. (NYT)

The co-CEOs of RIM will cut their salaries to $1. (FT)

Fitch cuts the ratings of Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS) and Barclays (NYSE: BCS). (Bloomberg)

PSA Peugeot Citroen , Fiat SpA and General Motors (NYSE: GM) lead a drop in European car sales. (Bloomberg)

Douglas A. McIntyre

With American Airlines on the sidelines, we’ve looked at the stocks of several other US carriers in a search for some hidden value: Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), Southwest Airlines Co. (NYSE: LUV), US Airways Group Inc. (NYSE: LCC), JetBlue Airways Corp. (NYSE: LCC), Alaska Air Group Inc. (NYSE: ALK), Hawaiian Holdings Inc. (NASDAQ: HA), and Spirit Airlines Inc. (NASDAQ: SAVE).

Delta Air Lines has a median target price of $18.00 and is trading at $8.39 around noon today. The implied gain here is about 115%. Delta’s share price is about -1.5% lower than it was on October 21st, so the implied gain is growing because the share price is falling. The target price is unchanged since October.

US Airways has a median target price of $10.00 and is trading today at $5.36, about -7.6% lower than the share price in late October. The implied gain is about 86.6%, and the target price is unchanged since October.

United Airlines has a median target price of $32.50 and is trading today at $19.94, yielding a potential upside of nearly 63%. The stock’s target price rose by $0.50 in the past six weeks, but the share price has fallen by about -1.4% in the same period.

Every one of the nine stocks we looked at has an implied gain of greater than 20%, proving once again that numbers often don’t tell the whole story. The only stock with a chance of offering investors some value is Alaska Air. But the chance is a very slim one.

Alaska Air’s median target price was raised from $80.00 to $83.00, and the share price has increased by about 5% since late October. It’s the only one of these nine to perform that combined feat. The stock’s potential upside is 22% and its forward P/E is 7.39. The company does not pay a dividend.

Alaska has ordered 15 new 737s from Boeing Co. (NYSE: BA) and deliveries are scheduled to begin in 2012. Thirteen of the new planes will be 737-900ERs, which carry a list price of $89.6 million each. That’s a total of about $1.2 billion, which is roughly equal to both the company’s long-term debt and to its available cash.

The company does not indicate how it will finance the purchase of these planes, but a recent report in the Financial Times indicates that European banks, the main lenders to global airlines, have cut back lending for commercial aircraft purchases. That means the airlines will have to issue debt or perhaps resort to leasing new planes.

The impact on aircraft makers like Boeing is likely to be greater than the impact on airlines, but what’s reasonably certain is that the cost of capital for aircraft is going to rise. For that reason, if for no other, investing in any airline stock now is a speculative play rather than a value play.

Paul Ausick

The International Air Transport Association (IATA) released this new forecast this morning, and that’s not even the worst news according to the group’s CEO:

The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion—the largest since the 2008 financial crisis.

There is some slightly positive news for US carriers like Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), Southwest Airlines Co. (NYSE: LUV), and US Airways Group, Inc. (NYSE: LCC). North American carriers are expected to generate about $1.7 billion in profits during 2012 primarily due to less capacity growth which will help keep profits up.

But that isn’t enough to keep the global industry on a positive track:

Even if government intervention averts a banking crisis it is unlikely that Europe will avoid a brief recession. Business and consumer confidence has already fallen too far. Global GDP growth forecasts for 2012 have been revised downwards to 2.1%. Historically the airline industry has seen profit turn into loss whenever global GDP growth falls below 2%. This is driving the downgrade in the 2012 outlook.

The IATA expects European-based airlines to lose $600 million next year, mainly due to economic weakness in their home countries and higher passenger taxes. Asia-Pacific carriers, including China, are expected to post a profit of $2.1 billion, down from an estimated $3.3 billion profit this year.

The 2011 profit forecasts for Middle Eastern and Latin American fell by $400 million each, to $400 million and $200 million, respectively. African carriers are still expected to break even in 2011. The 2012 forecast for these three regions have all been lowered: Middle Eastern carriers are now expected to post profits of $300 million, down from $700 million; Latin American carriers are expected to post 2012 profits of $100 million, down from $400 million; and African carriers are still expected to lose $100 million.

A bit of hope does exist for fuel prices to be no higher in 2012 than they are this year, and even for prices to fall if the Eurozone debt crisis doesn’t get fixed. Of course, if that fix doesn’t happen the airlines have bigger problems than the price of fuel.

Paul Ausick

It may seem odd, but the AMR bankruptcy is likely a boom for the likes of United Continental Holdings, Inc. (NYSE: UAL) and US Airways Group, Inc. (NYSE: LCC), which are up 6% and 10% respectively.  Southwest Airlines Co. (NYSE: LUV) is up 0nly 1 penny at $7.88 and Delta Air Lines Inc. (NYSE: DAL) is up 3.6% at $7.70.  Even JetBlue Airways Corporation (NASDAQ: JBLU) is catching a 5.7% pop higher.

All those bankruptcy rumors now turned out to be true.  AMR has noted that it has $4.1 billion cash in the bank and also that it will honor all tickets and reservations for American and American Eagle Flights.

The market is telling you that shareholders will be left with nothing here.  AMR’s stock is down 85% at $0.2311 and the new 52-week trading range is $0.80 to $8.89.

Gerard Arpey has also announced his decision to retire as Chairman and Chief Executive Officer.  I wonder what his parachute has considering that this wipes out shareholders.

This move will allow other airlines to have a stronger negotiating position, it will also allow for potentially higher ticket prices, and more nickel-and-dime fees.  If this wasn’t true you wouldn’t have the peers up as much as 10%.

Early this morning in the pre-market AMR’s stock was down about 60%.  For it to slide further is a sing of doom heading the way of AMR.  A bankruptcy stock down 60% indicated at least some chance of there being assets left over.  A drop of almost 86% is a sign of a death sentence.

JON C. OGG

Another airline that is also cheap and oversold is United Continental Holdings, Inc. (NYSE: UAL), but it is expected to only have breakeven earnings in the March quarter while Southwest is expected to be profitable in the current December and the coming March quarters. Companies like US Airways Group, Inc. (NYSE: LCC) and Delta Air Lines Inc. (NYSE: DAL) are both expected to have an operating loss in at least one of the next two quarterly reports.  The rumor mill also has many investors worried of a potential bankruptcy at AMR Corporation (NYSE: AMR).  JetBlue Airways Corporation (NASDAQ: JBLU) is attractive on valuations as well, but its problems seem to keep working against it even if its Northeast-dominance leaves it more subject to adverse weather conditions than most rivals. This leaves Southwest as the best of class among the large air carriers even if these other stocks also look oversold on their charts.
 
Southwest remains the most passenger-friendly large air carrier in the sky.  The company is also still digesting the acquisition of Airtran and it is now much more subject to the price of jet fuel that it was from 2006 to 2008.  Shares sold off from $12 to $8 during the summer sell-off and shares went well under $8 during the peak selling in late-September and early October.  After a recover, shares slid from $8.50 just about two weeks ago to end up at $7.73 most recently. 

The airline still sports a relatively young fleet and it still has perhaps the best safety record despite some less than headline-friendly in the last few years.  The company pays only a 0.2% dividend yield, but that is actually one of the few dividends in the airline sector.  With what may be more predictable earnings than peers, we view Southwest as the one airline that wants to be dividend-friendly in the years ahead.

We would consider the current $12.21 consensus analyst target from Thomson Reuters now artificially high even if the 52-week trading range is $7.15 to $13.77 versus a $7.73 price today.  In fact, that target price is high enough that we are even considering that analysts will lower their price targets ahead.  The stock is now trading under its stated book value and it trades at only about 1.1-times tangible book value.  And if it meets Thomson Reuters estimates, then the stock trades at 19-times 2011 and under 10-times 2012 expected earnings. Southwest should recover considerably unless the market tanks or unless an unforseen event occurs. 

We would note, Southwest has what is close to a net-zero exposure to Europe.  The only thing not in its favor is that hedging gasoline prices like it did in years past has been far less prevalent.  The company also has a better labor situation compared to other airlines. 

This was one of seven oversold picks poised for a comeback which was offered recently to our readers who sign up for our free daily newsletter service.  Each morning’s free newsletter is sent by email and includes the top news headlines, shows the top 15 or so analyst upgrades and downgrades, covers activist investor and insider trading, and offer key trading alerts for investors. Sign up in the box below.

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