First of all, let me say that based on personal experience, I don’t like CEB (Cebu Pacific). I have taken several round-trip flights with them and in almost all cases, something went wrong. :p I actually still have a coupon for a free one-way ticket that I have absolutely no intention of using. Nevertheless though, they are one of the hotter stories in the Philippine Stock Exchange right now.
Here’s a very well written analysis that can be found online: http://www.alphainvestments.ph/is-cebu-air-truly-worth-php150/
Now, be honest, did you read the entire thing or did you just scroll to the bottom after you saw all the figures?
Just about the major weakness with this, as with many stock analyses, are with his growth rate assumptions. We can argue all day about those so let’s not go there.
Instead, let us focus on the major cost for CEB (Cebu Pacific) which is fuel and the practice of “hedging”
WHAT IS HEDGING?
Simply put, hedging refers to the practice of taking certain actions to minimize certain risks. In the case of CEB, this will normally concern their fuel expenses which, as per the report, accounts for a HUGE chunk of their costs. To be more specific, CEB has prepaid for about 40% of their fuel needs at a cost of under $60 a barrel.
This means that even if oil prices jump back up to $70 per barrel or more, CEB will only be paying $60 for up to 40% of their jet fuel. Nice right?
However, the flip side of that is if oil remains below $50 a barrel, CEB is still committed to pay $60 or so. Not so nice
WHAT TO DO THEN?
Personal feelings about their service aside, I believe CEB is worth taking a position in for the following additional reasons:
1. Strong dollar will make it cheaper for OFW-funded families to travel this coming summer. This will be greatly countered by CEB having to pay more pesos for their dollar liabilities so you will ultimately have to pick a side.
Me? I think the strong dollar will allow these OFW-funded families to pay for more “extras” during flights and those ancillary revenues will win out versus the higher dollar costs. After all, those snacks and drinks aren’t purchased in dollars.
2. We are heading into a National election. Campaign personnel and material for national positions will have to be ferried throughout the country and CEB is the leader in the domestic market. So, that additional activity also bodes well for them.
All in all, there really is only one thing that can derail CEB at this point: A horrifying crash.
FYI, Cebu Pacific is currently trading at below 90 pesos a share so depending on whose numbers you believe, you are looking at a gain of anywhere from 67% to over 100% in the coming year.