Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put American Airlines Group Inc. (AAL - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, American Airlines has a trailing twelve months PE ratio of 6.20. This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 19.84. If we focus on the stock’s long-term PE trend, the current level puts American Airlines’ current PE ratio above its midpoint of 5.28 over the past two years, with the number having risen rapidly over the past few months.
Further, the stock’s PE also compares favorably with the Zacks classified Transportation sector’s trailing twelve months PE ratio, which stands at 15.21. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that American Airlines has a forward PE ratio (price relative to this year’s earnings) of 8.73, so we might say that the forward earnings estimates indicate that the company’s share price will likely appreciate in the near future.
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, American Airlines has a P/S ratio of about 0.61. This is way lower than the S&P 500 average, which comes in at 2.84 right now. Also, as we can see in the chart below, this stands somewhat below the highs for this stock in particular over the recent past.
If anything, AAL is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, American Airlines’ P/CF ratio of 3.58 compares favorably with the Zacks classified Transportation-Airline industry average of 5.57, which again indicates that the stock is undervalued in this respect.
Broad Value Outlook
In aggregate, American Airlines currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes American Airlines a solid choice for value investors. Clearly, AAL is a solid choice on the value front from multiple angles.
What About the Stock Overall?
American Airlines looks to be a good choice for value investors, and there are other favorable factors that this company enjoys, as well. It is worth noting that American Airlines has a Growth grade of ‘B’ and a Momentum score of ‘A’. This gives AAL a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
However, the company’s recent earnings estimates have been mixed at best. The current quarter has seen four estimates go higher in the past sixty days compared to one lower, while the full year estimate has seen five revisions upward and one downward in the same time period.
This has had a clear impact on the consensus estimate, as the current quarter consensus estimate has risen by 11.6% in the past two months, while the full year estimate has climbed just 2.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.
American Airlines is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Transportation-Airline industry has largely underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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