An alternative investment thesis for investing into Lufthansa.
Airline stocks have taken a massive hit as customers cancel all but urgent travel and governments introduced travel restriction s and ban foreign citizens from entering their countries due to the ongoing COVID-19 crisis. There’s no doubt the carriers’ first-quarter earnings will get a hit massively. Some might even go bankrupt without a government bailout.
Lufthansa is no exception. Taking a look at its stock price chart we can clearly see that concerns are reflecting Lufthansa’s stock price.
I do believe however, that if Lufthansa ever had to face bankruptcy, the German government would probably bail them out as Lufthansa is considered systemically relevant for an industrial nation such as Germany. Lufthansa also happens to be a large shareholder in Fraport (ISIN: DE0005773303) with a 8.44% stake, which operates Frankfurt Airport in Frankfurt am Main and holds interests in the operation of several other airports around the world.
I believe it was Richard Branson who said, “If you want to be a Millionaire, start as a billionaire and then buy an airline”.
The reason airlines are usually considered a disastrous investment is because they demand an insane amount of capital, their profit margins are narrow and their product is more or less a commodity.
I am not saying opportunities do not exist in this industry. One might say that now is the time to buy Lufthansa stock.
But buying stock just because it dropped doesn’t mean it’s a good investment. That would be stock price investing rather than buying and owning a good business.
However, if would is interested in profiting from this crisis, I would advice that person to look into Lufthansa bonds (ISIN XS1271836600). They are currently trading at 83% of face value with a 5.125% coupon.
The benefits of buying the bond instead of the stock are the following:
- Dividends are probably going to get cut or cancelled. The bonds’ interest payments will continue.
- The bond was trading at 103% before the crash. Assuming it goes back to its previous levels when this crisis blows over, you will have a 24% gain from the bond price movement alone.
I personally don’t hold this in my portfolio, but this might be something that can be of interest to you.