American Airlines Soars 15% as Strong Q4 Earnings Outlook is Announced

American Airlines stock (NASDAQ: AAL) has climbed 15% this month following an increase in its Q4 earnings forecast. The airline now anticipates earnings between $0.55 and $0.75 per share, up from the previous estimate of $0.25 to $0.50. A significant factor in this update is the recently struck agreement with Citibank to launch a co-branded credit card—AAdvantage. This move is expected to enhance cash flows for American Airlines in the upcoming years, with projections indicating an additional $10 billion in annual revenue and a $1.5 billion boost in pre-tax income.

Impressive Growth Over the Year

AAL stock has shown resilience, increasing by 31% from early 2023, when it was priced at $13, to its current price of $17. Several factors contribute to this impressive rise:

1. a 168% surge in adjusted earnings, jumping from $0.50 in 2022 to $1.34 now; partly offset by
2. a 51% decline in the trailing P/E ratio, which decreased from 25x in 2022 to 12x currently;

Driving Forces Behind Earnings Growth

The substantial earnings growth of 168% since 2022 can be attributed to increased revenues and improved margins. American Airlines’ revenue rose from $49 billion in 2022 to $54 billion currently. The airline industry has experienced a notable rebound in travel demand post-pandemic. American Airlines has expanded its capacity by 12%, growing from 260 billion to 291 billion during this period, although the average yields have seen a decline.

In addition to increased sales, the company’s adjusted net margin grew from 0.7% to 1.7%. Higher revenues combined with margin growth propelled earnings to $1.34 per share over the last year, compared to $0.50 per share in 2022.

Factors Behind the Fall in Valuation

Despite these gains, investors have expressed concerns about American Airlines’ stock due to its low margins. Although net margins have improved since 2022, they remain significantly below the approximately 5% margins observed before the pandemic. The adjusted net income margin of 3.5% in 2023 is a decline from previous years. Increased operating expenses, excess capacity, and competitive pressures on fares have all impacted profitability.

Moreover, investors are wary of the airline’s high debt levels, which amount to $39 billion, resulting in a debt-to-equity ratio of 370%. On a positive note, potential Federal Reserve interest rate cuts could alleviate some of the financial pressure by reducing interest expenses.

Future Growth Potential for AAL Stock

At a current price of $17, AAL stock has risen 22% this year. However, analysts believe it is now fairly valued. Over the past three years, AAL has underperformed compared to the overall market, with returns of 14% in 2021, -29% in 2022, and 8% in 2023. In contrast, the Trefis High-Quality (HQ) Portfolio, comprising 30 stocks, has consistently outperformed the S&P 500, proving to be less volatile and offering better returns for investors.

In light of the current uncertain macroeconomic climate and geopolitical conditions, American Airlines stock could face challenges ahead. The projected valuation of American Airlines is $15 per share, suggesting roughly a 10% decline from its current trading level of $17. This estimate is based on a lower 11x multiple of trailing adjusted earnings of $1.34 per share, in comparison to the stock’s average P/E ratio of 15x over the last two years. The company’s high debt levels make this decrease in valuation seem reasonable. However, the partnership with Citibank is expected to strengthen cash flows and assist in reducing debt over time. In light of this, investors may find better long-term growth opportunities in alternative airline stocks like Alaska Air, which presents a more favorable financial risk profile.

Peer Comparisons and Stock Performance

While it appears that AAL stock is fully valued at present, it is crucial to analyze how American Airlines’ peers are performing based on critical metrics. More insights and comparisons for companies across various industries can be found at Peer Comparisons.

[1] Returns as of 12/18/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
Explore all Trefis Price Estimates

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.