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Analyst Blog

Fort Worth, TX-based American Airlines Group (AAL - Analyst Report) with market capitalization of $18.63 billion is among the most well-known players in the U.S. airline industry. However, the carrier, like most of its peers in the airline space, is facing tough times.

Recently, the carrier fell out of favor as far as Raymond James is concerned. Analysts at the firm downgraded the stock to “Market Perform” from “Outperform” on valuation concerns. The downgrade contributed to the stock losing value on Sep 21 and closing at $34.67. 

Opinions of broker(s)/analysts on a particular stock serve as an important pointer for investors. Analysts attend company conference calls/presentations and scrutinize every detail available publicly before advising investors about their course of action. Naturally, more often than not investors pay heed to such well-researched information. Hence, it comes as no surprise that the stock plunged 1.37% following the downgrade.

Why the Downgrade?

Analysts at Raymond James believe that American Airlines is more expensive compared to its peers Delta Air Lines (DAL - Analyst Report) and United Continental Holdings (UAL - Analyst Report) . Given the challenges that American Airlines is currently facing, this expensive valuation is not justified. Analysts are also concerned about the carrier’s balance sheet, which is weaker than its abovementioned peers.

American Airlines exited the second quarter of 2016 with a debt-to-capitalization ratio in excess of 83%, which is very concerning. The ratio for Delta Air Lines and United Continental at the end of the second quarter were much lower, 36.2% and 56%, respectively.

Raymond James analysts believe that the recent pay-related deal of American Airlines with its mechanics might serve as a dampener to its profits in the short term. Moreover, they expect the carrier to reduce its annual buyback levels in 2019 due to an increase in costs associated with debt repayment, pension payments and others. This is likely to hurt the carrier’s performance in the long run.

Apart from the downgrade, American Airlines faces other headwinds like the surge in terrorism and unit revenue issues to name a few. Moreover, American Airlines has a significant exposure to UK. This makes it highly vulnerable to the Brexit induced uncertainty.

Given this backdrop, it is best to look elsewhere in the airline space for better investment opportunities. We note that American Airlines is not a Buy-rated firm according to the Zacks methodology either. The carrier currently carries a Zacks Rank # 3 (Hold).

How to Identify the Outperformers?

The airlines industry is deeply entrenched in a bearish territory, as evidenced by the Zacks industry rank of 184 (out of more than 260 groups) carried by the Transportation-Airline segment. Hence, it is by no means an easy task to arrive at winning stocks in the space.

Though it is a daunting task to find the most attractive picks at the moment, Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

Stocks that Warrant a Look

Copa Holdings (CPA - Snapshot Report) , is a leading Latin American airliner that operates through its subsidiaries – Copa Airlines and AeroRepublica. The carrier sports a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here. The Panama City-based carrier has been an impressive performer this year, with its shares surging more than 84%, year to date. The carrier has a robust earnings history.

It outpaced the Zacks Consensus Estimate in three of the last four quarters with an average beat of 37.04%. The Zacks Consensus Estimate for 2016 has climbed 10 cents to $4.55 per share over the last seven days.

SkyWest, Inc. (SKYW - Snapshot Report) , which operates as one of the larger regional airlines in the United States, holds a Zacks Rank #2 (Buy). The carrier is headquartered at St. George, UT. 

The company’s estimated earnings growth rates for the current and next quarter are 14.08% and 13.27%, respectively. Earnings are expected to grow by 33.84% in 2016. The company has also seen its earnings estimates rise from $2.53 per share two months ago to the current level of $2.65.

Tokyo-based ANA Holdings Inc. (ALNPY - Snapshot Report) offers air passenger and air courier services. The carrier carries a Zacks Rank #2, which makes it a good investment choice. Earnings for the company are expected to grow more than 24% this year. Even for the next year, the growth rate is expected to be higher than the industry average.

Ryanair Holdings plc (RYAAY - Snapshot Report) is an Irish, low-fare airliner that primarily operates from Europe. The carrier has a Zacks Rank #2. The carrier has a market cap of $18.95 billion.

The company has a PEG ratio of just 0.36. A company with a PEG ratio of less than 1 is generally considered to be undervalued. The company has also seen its earnings estimates rise from $5.91 per share two months ago to the current level $5.99.

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