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 7.77. This level compares considerably favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.09.
If we focus on the long-term trend of the stock the current level puts American Airlines’ current PE among its highs over the observed period. This suggests that the stock is overvalued compared to its own historical levels.
Further, the stock’s PE also compares favorably with the airlines industry’s trailing twelve months PE ratio, which stands at 10.18. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
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 0.58. This is much lower than the airlines industry average, which comes in at 0.91 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
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.
Broad Value Outlook
In aggregate, American Airlines currently has a Value 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, and some of its other key metrics make this pretty clear too.
For example, its P/CF ratio (another great indicator of value) comes in at 3.55, which is better than the industry average of 4.00. Clearly, AAL is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though American Airlines might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘B’ and a Momentum score of ‘C’. This gives AAL a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s earnings estimates have been trending upwards lately. The current quarter has seen five estimates go higher in the past sixty days compared to one lower, while the full year estimate has seen nine upward revisions and no downward revision in the same time period.
This has had a small but meaningful impact on the consensus estimate as the current quarter consensus estimate has inched up 1.2% over the past two months, while the full year estimate has increased 6.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
American Airlines Group, Inc. Price and Consensus
The stock holds a Zacks Rank #3 (Hold), which indicates expectations of in-line performance from the company in the near term. However, American Airlines is enjoying bullish analyst sentiment, as indicated by the positive estimate revisions, and this works in the company’s favor.
American Airlines is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 8% out of more than 250 industries) further supports the growth potential of the stock.
In fact, over the past one year, the airlines industry has clearly outperformed the broader market, as you can see below:
We are also impressed by the company’s efforts to reward shareholders through share buybacks and dividends. Further, the company’s expansion efforts, such as the recent purchase of a minority stake in China Southern Airlines, also bode well.
So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.
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