Buying American Airlines Is Betting on an Earnings Beat

Stock Market
  • American Airlines (AAL) stock bounced off a low in March
  • Analysts are betting it beats estimates later this month
  • The debt, the debt, the debt
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American Airlines (NASDAQ:AAL) stock took off in mid-March. Shares were due to open at $18.16 on April 4, 40% higher than they were on March 7.

The end of mask mandates is helping power the stock higher. The company also raised its revenue outlook in mid-March. Combine that with easing fuel prices and there are high hopes for profits ahead.

An indication of that future comes when American reports its first quarter later this month. A loss of $2.50/share is expected. Beat that handily and the bulls will run.

AAL American Airlines Group Inc. $17.86

Bulls See Clear Skies

There are some facts about airline stocks  that aren’t in dispute.

Demand is returning at airports. TSA traffic counts showed 2.2 million passengers traveled by air on April 3. In 2019 the number was 2.46 million.

There seems to be enormous pent-up demand. Prices are climbing with jet fuel costs and people aren’t complaining about it. They’re complaining about other things, like flight cancellations and high load factors. But they seem desperate to return to normal.

That means American could easily top its revenue estimate of $8.45 billion. That would be more than double the revenue of a year ago. In 2019 American had revenue of $45.7 billion and net income of $1.4 billion, $3.10/share.

American also changed CEOs this month. Robert Isom is the new boss, replacing Doug Parker. There’s always a warm glow on a management change, although experienced analysts aren’t expecting much.

Bears See Big Debts

In general, analysts have yet to turn around on AAL stock. Tipranks counts only one bull among the 14 following it, with three sellers.

A look at the airline’s balance shows the trouble. American took on over $13 billion in new debt as it struggled to survive the pandemic. It had $42.2 billion in debt at the end of 2021, against $13.4 billion in cash.

Some of that debt carries a coupon rate of 11.75%.  Even notes carrying a rate of 3.75% are still selling below par. They bounced off a low of 0.82 in February but are only asking 0.92 today. That’s still an effective rate of over 4%. Fitch recently reaffirmed the airline’s credit rating at B-  but stable.

I warned investors away from American back in December 2020, when its price was near its current level. Its market cap is now $11.6 billion, barely one-fourth its debt level.

There are two ways for companies to raise cash, and debt is just one of them. The other is by selling more stock, diluting existing shareholders. American has added 200 million new shares since the end of 2019, an increase of nearly 50%. Our Faisal Humayun is concerned that another equity raise could be coming.  That could wipe out the recent gains of current shareholders.

The Bottom Line on AAL Stock

American Airlines stock is not yet an investment, except for very aggressive buyers.

At best it’s a speculation. It’s a way for you to get action on the economic temperature. Over the last year American stock has traded for as much as $24/share and for as little as $12. Options through the end of the month indicate substantial interest at $20 by the end April, indicating it’s due for a 10% gain.

But American has a long, long way to go before it returns to normal. Even beating 2019’s earnings won’t make a big dent in that debt. As a long-term investor I believe there are easier ways to make money, even within the airline sector. Consider the debt of Southwest Airlines (NYSE:LUV), excluding capitalized leases, is now less than its 2021 revenue.

If you want to own a normal airline stock, buy a normal-looking balance sheet.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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