American Airlines (AAL - Free Report) is down almost 20% over the past 52-weeks and analysts continue to adjust earnings downward. Over the past 90 days AAL 2019 earnings have been adjusted down by 9%, and 2020 EPS estimates have been adjusted down 8% in the same time frame. The most accurate analysts have estimates even lower than the consensus. The current outlook for AAL looks grim pushing it into Zacks Rank #5 (Strong Sell).
Reasons to Sell
American Airlines currently has 24 Boeing 737 MAX (BA - Free Report) planes making up 2% of its fleet, the second most in the US behind Southwest (LUV - Free Report) . The Boeing MAX is currently grounded until August when they will reassess this timeline and likely add another 3-9 months until these planes can fly again. American Airlines will likely have a 1% loss in capacity, according to management guidance, until 2020. This may not sound like a lot, but when you take into account the efficient margins that the MAX was expected to bring to the table the impact is multiplied.
Rising oil prices are the most substantial concern for any airline, with it being their largest variable cost. Oil is up over 30% this year so far and could continue. OPEC agreed to cut 1.2 million BPD in supply, turmoil in Venezuela is killing their oil production and Iran oil sanctions is going to be pulling over 1 million BPD off the market starting tomorrow. Oil prices are subject to continue to increase if these supply concerns aren't fully priced in. This increase will have a materially adverse effect on American Airline’s bottom line.
What concerns me most about this stock is its negative earnings growth. American Airlines has had consistent to growing revenue since 2015 but has lost almost 70% on its bottom line in the past 3 years with margins falling drastically.
Reasons to Hold
American Airlines has substantially underperformed the market & the airline industry, but this stock may be oversold. Currently, AAL is trading at a P/E of 6.23x significantly below the industry average of 10.36x. Price to sales and price to cash-flow are also both considerably below the industry average. Unfortunately, AAL has all the momentum pushing it down. This downward momentum is subject to continue with the negatively adjusted guidance and oil price increases but look to buy AAL below $30. From the analyst reports that I have examined many of them are setting a long term price target of $41. I wouldn’t short this stock but watch it continue to fall and maybe buy on an upswing.
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