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Who Are American Airlines (AAL)?

•American Airlines (AAL) is the world’s largest airline by aircraft, capacity, and scheduled revenue passenger miles.

•American Airlines has a strong track record of profitability and growth. In the past five years, the company has generated over $100 billion in revenue and has consistently outperformed its peers in terms of earnings per share.

The Bull Case

1. AAL Valuation

As always, the first thing I look at when considering a stock is its current valuation. There are a lot of ways to value a stock, but looking at a few different metrics is always the best way forward.

For DFC, AAL looks to be worth roughly $32 a share. Right now, the stock price is at just over 16$ – meaning a 50% undervaluation. This gives me a fantastic margin of safety, if I decide to invest.

P/E Ratio isn’t bad either; coming in lower than its competitors, some of whom have worse financials are much worse.

AAL’s P/E is 6 FYI. Meanwhile, United Airline’s is 9 and Delta’s is 14.4%

2. Management

AAL management seem to know what they are doing.

There are real positives in the company’s financials, and the leadership

In a moment, I’ll discuss AAL’s debt. And while this is a major issue for the company – the leadership team have recognized this and are making efforts to amend

3. Airline Recovery

Without question, air travel is on the flight path of recovery.

Demand for air travel will increase.

As the USA’s largest airline, American Airlines will disproportionately benefit from this increased demand.

As a result, analysts predict an annual revenue growth 20.3%.

Naturally, if AAL can meet these targets, their stock price will rice as a result.

The Bear Case

1. Business Travel

In my Bull Case 3, I argued that demand for air travel was rising – and this is certainly true.

However, what I failed to mention was my own opinion that, over the long term, many airlines will be faced by decreasing demand for business travel – as platforms such as Zoom and Microsoft Teams offer.

This analysis is hardly anything new, but it stands all the same.

This will undoubtably impact American Airlines future growth prospects, now or in the future, which will have a direct impact on the company’s share price.

That’s just one of the reasons the business is a no go for me.

2. Debt and Interest Expense

As of their last quarterly filing, AAL have a whopping $30 billion worth of net debt.

That places their debt-to-equity ratio at -597% – a shocking figure if ever there was one.

On top of that, interest expenses are sitting at $2 billion – and only seem to be increasing year after year.

It’s not all doom and gloom, since American Airline’s cash flow is stable, but the level of debt is simply far too high for me to consider opening a position.

3. Unending Competition

The airline industry is highly competitive – perhaps now more than ever.

It is difficult in my view for AAL to improve its financial position, as it is difficult to simply to raise prices – as customers will simply veer towards Delta, United, etc.

On top of this, some costs are not fixed. Fuel for example, can change on a daily basis.

There has also been talk of increased staffing costs, as Delta Airlines have recently agreed a pay hike for both pilots and flight attendants.

Final Thoughts

Additional Notes

Wall Street overwhelmingly rates AAL as a hold.

On June 13, United Airlines entered negotiations for pay with their pilots; a clear sign of things to come for AAL.

AAL have expressed interest in Air Taxi services – something I believe will be a fad at best. AAL have a partnership with Vertical Aerospace.

Insider transactions for the past 6 months were all sells – not what I like to see at all.

Conclusion

As you can see from the scoreboard, in many respects, American Airlines might look like a buy.

Unfortunately, the financials drag down the overall rating. Debt levels are far too high for me, as a value investor, and I don’t feel increased air travel demand will make a major difference for the company’s share price.

Also, the airline industry is fiercely competitive – and I know AAL are going to struggle to improve their bottom line, especially as costs rise.