American Airlines Stock Falls, But This Is What Will Come Next

by Trefis Team
American Airlines Group
Rate   |   votes   |   Share

American Airlines (NASDAQ:AAL) stock fell -12.3% in the last 5 trading days. That’s not surprising as the demand improvement has been slower than expected. People are still not traveling, and Covid-19 cases are rebounding both in the US and Europe. Considering this, what should you as an investor do? The answer might appear counter-intuitive but here is our take. We believe that while the stock may see further downside in the coming weeks, it might also present a good price point to make a long-term investment. Here is how.

Trefis’ AI engine analyzes past patterns in stock movements to predict near term behavior for a given level of movement in the recent period, and suggests a 24% probability of American Airlines stock rebounding 10% or more over the next 21 trading days. Notably, though, the chances of the stock dropping a further 10% are slightly higher at 31%. This warrants slight caution on the part of investors for the next month. But what happens beyond 1 month? The outlook changes if we look at a 3-month period, with the chances of the stock going up 10% or more improving to 44% (from 24% for a one-month period), and chances of the stock dropping 10% or more reducing to 22% (from 31% for a one-month period). This suggests that American Airlines is 2x likely to rise 10% than fall the same amount over the next 3 months. Our detailed dashboard highlights the chances of American Airlines’ stock rising after a fall and should help you understand near-term return probabilities for different levels of movements.

But that’s just the near term outlook which potential investors can use to assess the right entry point. But bigger issue is – is there a long-term investment potential? Turns out, there is, despite not very encouraging financials. Our dashboard Big Movers: American Airlines Moved -12.3% – What Next? lays this out.

On first look, American Airlines’ underlying financials may not make sense and market performance may not seem to make sense. After all, the stock declined -45% between 2017 and 2019, and has further dropped a massive -60% this year as a result of halted operations. In addition, the revenue growth has not been stellar either. American Airlines’ revenue has increased just 7.4% from $42,622 Mil in 2017 to $45,768 Mil in 2019. But here is the worrying part. For the last 12 months, this figure stood at $24,623 Mil, implying a decrease of -46% over 2019 numbers. For the full year 2020, the revenue figures are likely to drop further. In addition, the company has barely managed to operate on 3-4% net margins historically, and this figure plummeted to -25.6% for the last 12 months. So why would you even consider investing? Simply because the stock is nearing its bottom, cash burn is reducing, y-o-y revenue decline for each quarter is reducing, and there is sufficient liquidity (nearly $13 billion) to ride out the lean demand phase. In addition, American Airlines’ P/S ratio is currently around 0.2, higher than its bottom of 0.12 earlier this year. A P/S level of 0.12 was last seen for American Airlines in 2010 during the global economic recovery phase. The recovery in multiple has been sharper this time, and gives us confidence.

While an investment in American Airlines can be considered, there are much better investment opportunities out there. Check out a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!