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American Airlines (AAL) Plunges 32% in 3 Months: Buy the Dip?
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Shares of Fort Worth, TX-based airline heavyweight American Airlines (AAL - Free Report) have not had a good time on the bourses of late, declining 31.7% over the past 90 days. The horrendous price performance resulted in AAL underperforming its industry’s 10.5% decline in the said time frame as well as the S&P 500, of which the airline is a key member. Additionally, AAL’s price performance compared unfavorably with that of fellow U.S. airline operators United Airlines (UAL - Free Report) and Delta Air Lines (DAL - Free Report) in the same timeframe.
Three-Month Price Comparison
Image Source: Zacks Investment Research
In fact, American Airlines shares have plummeted 65% over the past five years and are currently trading at levels touched in 2020, which represented the peak COVID-19 times. During those times, the entire airline industry had basically come to a standstill, with passenger revenues hitting a nadir.
Given the significant pullback in AAL’s shares currently, investors might be tempted to snap up the stock. But is this the right time to buy AAL? Let’s find out.
Bearish Guidance for the Current Year
On Jul 25, American Airlines reported lower-than-expected revenues for the second quarter of 2024. Additionally, the airline trimmed its earnings per share forecast for full-year 2024, citing pricing pressure with excess capacity characterizing certain markets.
The practice of price cuts by low-cost carriers, as they struggle to fill the excess seats this summer, is hurting even bigger rivals. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors to do the same to stay competitive. This phenomenon dampened American Airlines’ pricing power. AAL’s management now expects current-year adjusted earnings per share in the 70 cents-$1.30 range (earlier expectation was in the range of $2.25-$3.25 per share).
AAL’s revenue miss was not surprising as in May CEO Robert Isom stated that the softness pertaining to bookings was due to changes in the airline's sales strategy. Vasu Raja, AAL’s chief commercial officer, who was spearheading the new sales and distribution strategy, stepped down in June.
Other Headwinds
Apart from the pricing and top-line woes the northward movement in operating expenses is hurting American Airlines’ bottom line, challenging its financial stability. In the first half of 2024, total operating expenses rose 7.9% year over year to $25.5 billion. The surge in operating expenses was primarily caused by an increase in labor costs and fuel expenses. Expenses on wages and benefits rose 13.1% in the same time. As a result of the deal with pilots inked last year, labor costs are surging.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. Management expects fuel prices (including taxes) to be between $2.55 and $2.65 per gallon for the third quarter of 2024. The metric is expected to be between $2.65 and $2.75 per gallon for the full year.
We are also concerned about its high debt levels. The company’s times interest earned ratio of 1.5 at 2023-end compares unfavorably with the industry’s ratio of 4.6.
Long-Term Debt to Capitalization
Image Source: Zacks Investment Research
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
Upbeat Air Travel Demand: A Saving Grace
Strong passenger volumes bode well for AAL. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Driven by the air travel demand strength, AAL’s top line increased 2.5% year over year in the first half of 2024. This was driven by a 2.4% rise in passenger revenues.
From a valuation perspective, AAL is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
To Sum Up
There is no doubt that the stock is attractively valued and upbeat passenger revenues are serving AAL well. However, given the abovementioned headwinds, we believe that it is not at all advisable to buy the dip in this Zacks Rank #5 (Strong Sell) stock until the company demonstrates substantial improvement in its performance. With declining earnings estimates, the stock is witnessing negative investor sentiments.
Image: Shutterstock
American Airlines (AAL) Plunges 32% in 3 Months: Buy the Dip?
Shares of Fort Worth, TX-based airline heavyweight American Airlines (AAL - Free Report) have not had a good time on the bourses of late, declining 31.7% over the past 90 days. The horrendous price performance resulted in AAL underperforming its industry’s 10.5% decline in the said time frame as well as the S&P 500, of which the airline is a key member. Additionally, AAL’s price performance compared unfavorably with that of fellow U.S. airline operators United Airlines (UAL - Free Report) and Delta Air Lines (DAL - Free Report) in the same timeframe.
Three-Month Price Comparison
In fact, American Airlines shares have plummeted 65% over the past five years and are currently trading at levels touched in 2020, which represented the peak COVID-19 times. During those times, the entire airline industry had basically come to a standstill, with passenger revenues hitting a nadir.
Given the significant pullback in AAL’s shares currently, investors might be tempted to snap up the stock. But is this the right time to buy AAL? Let’s find out.
Bearish Guidance for the Current Year
On Jul 25, American Airlines reported lower-than-expected revenues for the second quarter of 2024. Additionally, the airline trimmed its earnings per share forecast for full-year 2024, citing pricing pressure with excess capacity characterizing certain markets.
The practice of price cuts by low-cost carriers, as they struggle to fill the excess seats this summer, is hurting even bigger rivals. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors to do the same to stay competitive. This phenomenon dampened American Airlines’ pricing power. AAL’s management now expects current-year adjusted earnings per share in the 70 cents-$1.30 range (earlier expectation was in the range of $2.25-$3.25 per share).
AAL’s revenue miss was not surprising as in May CEO Robert Isom stated that the softness pertaining to bookings was due to changes in the airline's sales strategy. Vasu Raja, AAL’s chief commercial officer, who was spearheading the new sales and distribution strategy, stepped down in June.
Other Headwinds
Apart from the pricing and top-line woes the northward movement in operating expenses is hurting American Airlines’ bottom line, challenging its financial stability. In the first half of 2024, total operating expenses rose 7.9% year over year to $25.5 billion. The surge in operating expenses was primarily caused by an increase in labor costs and fuel expenses. Expenses on wages and benefits rose 13.1% in the same time. As a result of the deal with pilots inked last year, labor costs are surging.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. Management expects fuel prices (including taxes) to be between $2.55 and $2.65 per gallon for the third quarter of 2024. The metric is expected to be between $2.65 and $2.75 per gallon for the full year.
We are also concerned about its high debt levels. The company’s times interest earned ratio of 1.5 at 2023-end compares unfavorably with the industry’s ratio of 4.6.
Long-Term Debt to Capitalization
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Upbeat Air Travel Demand: A Saving Grace
Strong passenger volumes bode well for AAL. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Driven by the air travel demand strength, AAL’s top line increased 2.5% year over year in the first half of 2024. This was driven by a 2.4% rise in passenger revenues.
From a valuation perspective, AAL is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
To Sum Up
There is no doubt that the stock is attractively valued and upbeat passenger revenues are serving AAL well. However, given the abovementioned headwinds, we believe that it is not at all advisable to buy the dip in this Zacks Rank #5 (Strong Sell) stock until the company demonstrates substantial improvement in its performance. With declining earnings estimates, the stock is witnessing negative investor sentiments.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.