Evaluate whether to Acquire, Sell, or Maintain Positions in American Airlines Shares at $17?
Evaluate whether to Acquire, Sell, or Maintain Positions in American Airlines Shares at $17?
American Airlines Equity (NASDAQ: AAL) has surged 15% this month, following the company boosting its Q4 projections. American Airlines now anticipates its Q4 earnings to be between $0.55 and $0.75 per share, upgrading from its previous projection of $0.25 to $0.50. The company's enhancement in partnership with Citibank for a co-branded credit card, AAdvantage, will drive more revenue in the coming years. This partnership is projected to produce $10 billion annually and boost the company's pre-tax income by $1.5 billion.
Taking a broader perspective, AAL stock has grown 31% since $13 in early 2023, reaching $17 now.
- Revenue for the company has increased by 168%, going from $0.50 in 2022 to $1.34 this year; however,
- The company's trailing P/E ratio has fallen by 51%, dropping from 25x in 2022 to 12x currently.
Let's delve deeper into these factors. If you're looking for investment growth with a smoother ride than a single stock, consider the *High-Quality Portfolio**, which has outperformed the S&P, with over 91% returns since inception.
What Factors Contributed to American Airlines' Earnings Growth?
American Airlines' earnings have expanded by 168% since 2022 due to both revenue growth and increased margins. American Airlines' revenue has climbed from $49 billion in 2022 to $54 billion currently. The airline industry has seen a robust recovery in air travel demand post-pandemic. American Airlines' capacity has expanded by 12%, from 260 billion in 2022 to 291 billion now. The company's occupancy rate has increased, while its average yields have decreased.
On top of the revenue increase, American Airlines' adjusted net margin has also expanded from 0.7% to 1.7% over the same period, leading to earnings rising to $1.34 per share over the past twelve months, up from $0.50 per share in 2022.
What Led to the Reduction in Valuation Multiple?
Investors have been less optimistic about American Airlines stock due to its relatively low margins, despite the net margin's rise since 2022. Although the net margin has improved, it is still below the around 5% levels seen before the pandemic. Higher operational costs, surplus capacity, and increased fare competition are some of the factors that have affected American Airlines' profitability recently.
Additionally, investors have expressed concerns about American Airlines' high leverage, holding $39 billion in debt, resulting in a 370% debt-to-equity ratio. However, the Fed rate cuts are expected to improve American Airlines' profitability amid lower interest costs.
Does AAL Stock Have Potential for Further Growth?
At its current price of $17, AAL stock has appreciated by 22% this year, and we believe it is already fully valued. Note that AAL stock has underperformed the broader market in the last three years, with returns of 14% in 2021, -29% in 2022, and 8% in 2023. Conversely, the Trefis *High-Quality Portfolio*, featuring 30 stocks, has been more stable and outperformed the S&P 500 over the same period.
Considering the current uncertain macroeconomic climate, could AAL stock see higher levels? Based on our analysis, American Airlines' Valuation is projected to be $15 per share, representing an approximately 10% decline from its current pricing of $17. Our forecast is based on a P/E ratio of 11x for the trailing adjusted earnings of $1.34 per share, much lower than the stock's average P/E ratio of 15x over the last two years. We think a reduced valuation multiple for American Airlines is reasonable given its high debt load. The deal with Citibank will increase cash flow and help the company deleverage in the coming years, leading to some optimism in the stock's price. As a result, we advise investors to consider alternative airline stocks for better long-term returns. For instance, Alaska Air stock appears to have a better financial risk profile compared to American Airlines.
While AAL stock might be considered fully valued, it's valuable to examine how American Airlines' competitors fare on key performance indicators. You can find additional comparisons for companies across industries on the *Peer Comparisons*page.
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- American Airlines' asm (available seat miles) has increased by 12% from 260 billion in 2022 to 291 billion in 2023, contributing to the airline's increased capacity and revenue.
- The partnership between American Airlines and Citibank for the co-branded AAdvantage credit card is expected to contribute to AAL's annual revenue, with projections of generating up to $10 billion annually and boosting pre-tax income by $1.5 billion.