The ceasefire in the north, which came into effect last week, has seen a change in sentiment towards El Al's stock. After the Israeli airline's share price had risen 240% in the previous 13 months, it changed direction last week, losing 21%, with its market cap falling by NIS 575 million to NIS 3 billion. The share price opened slightly higher this week but is still well below its peak and is down over 2% today.
Since the start of the war, El Al has benefitted from a significant fall in competition. Foreign airlines have suspended their flights to Israel — some of them have been suspended during certain periods, and most have still not resumed flights. El Al has become the dominant airline in Israel's skies, with a 44% market share of passenger traffic at Ben-Gurion Airport.
Consequently, airfares have risen and El Al has reported record revenue and profits. In the third quarter of 2024, El Al's revenue was $1 billion, up 20% from the corresponding quarter of 2023, while in the second quarter of 2024 revenue, which was also a record, was up 43% from the corresponding quarter of 2023. Net profit in the third quarter was $187 million, 3.6 times higher than the corresponding quarter last year. The company's top executives, led by CEO Dina Ben Tal Ganancia have earned handsome bonuses following these results.
Last week's ceasefire is already bringing some foreign airlines back to Israel. Last week Wizz Air, Azal (Azerbaijan Airlines), Bulgaria Air, Air Seychelles, and Aegean announced the resumption of flights to Israel and this means more competition for El Al.
Hedge funds sell, the rest of investors buy
Although the Israeli airline is in excellent shape, with no outstanding debt, and stability is beyond any doubt, the return of competition was enough for some investors to sell. Data from the Tel Aviv Stock Exchange data hub indicate that those who led the recent decline in the share price were hedge funds and nostro companies, which have been selling the stock aggressively since the second quarter of the year, and in October and November alone, they sold El Al shares worth NIS 260 million. In contrast, foreign investors purchased shares of the company in these months, amounting to NIS 154 million, and institutions (pension funds and provident funds) purchased El Al shares during this period for NIS 50 million.
Daniel Alon, managing partner at IBI's Ram hedge funds, says, "Sophisticated investors bought the stock at the beginning of the fighting. When the war began, El Al issued a profit warning, and after a short period, replaced the negative warning with a positive one, in fact, it suddenly realized that the war was good for it. There were smart people who bought the stock even before, but those who bought after also made a lot of money until the eve of the ceasefire.
"Everyone who bought during this period made over 100% on their money within a year. Those who bought at low prices stayed invested until the ceasefire was announced and then suddenly exited the trade. These are investors who have no connection to the world of aviation, and as soon as the story ended, they threw away all the goods."
'The stock is extremely cheap'
Alon believes that by every parameter (profit multiples, comparing operating multiples to similar companies abroad, etc.) El Al's stock is "extremely cheap" — certainly now after last week's decline, but also at the peak it reached. "It's cheap because it's a company with a bad history, and pricing gaps take time to close," explains Alon. He also estimates that it will take institutional investors time to buy the stock: "Management is not taking clear actions, such as the announcement of the attempt to buy Isracard and then withdrawing from the deal. If instead, they had published an announcement that they were focusing on the core business, allocating a certain amount to the purchase of aircraft, a certain amount to dividends — I estimate that the stock would have traded 50% higher than today. But there is no clear strategy for what to do with the money."
He does not blame management for this, stressing, "About two years ago, El Al published a presentation with a strategy and stuck to it. The problem was that following the war, they stuck to it too quickly, and got there in a year instead of five years. Suddenly they have a lot of money, no debts, and don't know what to do with it. Instead of announcing that they will distribute a dividend when they can, they talk about acquiring companies to diversify the sources of income.
"But those who buy El Al shares want an airline, not a holding company. That's the fear in the stock. In general, there is a wonderful CEO who understands the world of aviation, but the company suffers from a 'disease' typical of Israel — a controlling shareholder, who is the one who decides what to do with the money."