AMR Emerges from Chapter 11; Its Stock Proves the Exception to the Rule

by George Putnam, III
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Submitted by George Putnam, III as part of our contributors program.

AMR Emerges from Chapter 11; Its Stock Proves the Exception to the Rule

AMR Corp. (the parent of American Airlines) officially emerged from bankruptcy on December 9, 2013 through a merger with U.S. Airways. The combined entity adopted the name American Airlines Group, Inc. (AAL), and its new stock symbol is AAL. AMR spent a total of 24 months in Chapter 11, originally filing for bankruptcy on November 29, 2011.

While I said back in October 2013 that the old AMR stock could be a good investment, I didn’t realize quite how good an investment it would turn out to be. When I wrote that in October, the AMR stock (symbol AAMRQ) was trading a little above $4 per share. The stock traded up to 12 shortly before the emergence/merger, and the new AAL stock has continued to go up since then.

As a result of AMR’s emergence from bankruptcy and merger with US Air, holders of the old AMR stock (AAMRQ) will receive new AAL stock in a complicated series of distributions. The first distribution, which has already been made, gives you 0.0665 new AAL shares for each old AAMRQ share. Then subsequent distributions will be made 30, 60, 90 and 120 days after the end of the bankruptcy; and the size of those distributions will depend on where the AAL stock is trading at the time of each distribution. Finally, there may be additional small distributions later on down the road depending on how outstanding claims against AMR are eventually resolved. Because of the complex nature of the distribution calculations, it is difficult to predict exactly what you will receive. Nonetheless, the returns on the old AAMRQ stock look pretty good: I estimate that if the new AAL stock remained at 26 throughout the distribution period, the total value received per share of AAMRQ stock could be about 16.91.

Where is the new AAL stock going from here? I like the long-term investing prospects for the combined American/USAir. They have a good route structure and should be able to realize significant cost savings from merger synergies. Moreover, as the airline industry continues to consolidate, that bodes well for all of the major carriers. The principal risk in AAL is that the merger does not go as smoothly as expected. For example, United Continental is still working out some of the kinks from its merger that took place more than three years ago.

As exciting as the gains on the old AAMRQ stock have proven to be, it is worth reminding investors that the vast majority of stocks of companies in Chapter 11 are not good investments. Even though Chapter 11 stocks often trade at very low prices, they are almost always overvalued. This is because in a bankruptcy proceeding all of the company’s creditors must be satisfied in full before any value can be given to stockholders. And by the time a company’s business deteriorates to the point where it must file for Chapter 11, there is almost never enough value to satisfy all those creditors.

That said, as I also mentioned in my contrarian investing newsletter back in October, I do see one other current Chapter 11 stock that could be an exception to the rule: Overseas Shipholding Group (OSGIQ), which operates oil tankers. Even though the OSG stock has nearly tripled since we highlighted it in October, I think it could have further to run if the tanker market continues to firm up. The company’s bonds are currently trading above 100 cents on the dollar which suggests that there will be value left over for the stockholders.

Disclosure Note: Accounts managed by an affiliate of the Publisher own the stocks of American Airlines and Overseas Shipholding Group.

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