American Airlines (AAL) is one of the world’s largest airlines by fleet size. The company is situated in Forth Worth, Texas, where it owns its iconic metroplex. I am bullish on the stock.
Earnings Outlook
American Airlines recently provided a general overview of its fourth-quarter earnings expectations. According to the firm itself, it’s anticipating $9.42 billion in revenue for the quarter, $30 million more than it initially expected.
Furthermore, American Airlines expects to end the quarter with $15.8 billion in liquidity, allowing it to outmuscle any distressed airlines to obtain further market share.
I analyzed the company’s earnings recognition pattern by looking at its Beneish M-score, and I found no real concerns. American Airlines’ M-score of -2.82 is safely below the -1.78 threshold, suggesting that aggressive accounting hasn’t been a feature lately. The only issue is the leverage at hand (1.18x), but this is to be expected if we consider operational constraints during the earlier pandemic stages.
The Worst of COVID-19 Stringency May Be upon Us
There seems to be a gradual shift in society’s attitude towards COVID-19 policies. Many are growing increasingly restless and aren’t willing to cancel their travel plans after new variant outbreaks anymore. I’m not commenting on what’s wrong or right here but rather on behaviouralism; it’s simply inconceivable to me that governments will be able to keep people locked down for much longer with the current narrative of the masses.
Delta Airlines’ CEO, Ed Bastian claims that Airlines believe that the worst is behind the industry: “We believe the worst is behind us, and we just need to navigate to get through this as a society,”
Valuation
There aren’t many reliable metrics available for airline companies at the moment because they’ve faced an unprofitable period. However, let’s take a look at the stock’s price-to-sales ratio of 0.46. It’s evident that it’s still undervalued relative to the generally accepted benchmark, as it is trading at a 71% discount to the sector median of 1.58.
Investors need to look out for positive divergence between return on equity and the firm’s cost of capital after the earnings report, as this could be indicative of increasing justified book value, which could cause a momentum flow for the stock.
Wall Street’s Take
Turning to Wall Street, American Airlines has a Hold consensus rating, based on one Buy, five Holds, and two Sells assigned in the past three months. The average American Airlines price target of $18.94 implies 7.4% upside potential.
Concluding Thoughts
American Airlines has provided bullish guidance on its fourth-quarter earnings report amid a recovery in the travel industry. The stock is undervalued according to its price-to-sales ratio, suggesting that upside may be in store.
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