Should You Pick American Airlines Stock At $14 After A 6% Fall In A Week?

American Airlines (NASDAQ: AAL) stock has seen a decline of 6% in a week, after it revised its Q1’24 earnings outlook to be at the lower end of its earlier provided range of $(0.15) to $(0.35) per share, compared to a $(0.23) consensus estimate. This can be attributed to higher than expected fuel prices. The company expects its average fuel costs to be $2.85 per gallon, versus its prior outlook of $2.75 per gallon (at the mid-point of the guided range). However, we think that AAL stock has some room for growth after its recent decline. We discuss more in the sections below.

Looking at AAL stock performance over a slightly longer term, it has seen little change, moving slightly from levels of $15 in early January 2021 to around $15 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. Notably, AAL stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 14% in 2021, -29% in 2022, and 8% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AAL underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AAL face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a strong rebound? From a valuation perspective, we think AAL stock has some room for growth. We estimate American Airlines’ Valuation to be $16 per share, reflecting over 15% upside over its current market price of around $14. Our forecast is based on 0.2x sales for American Airlines, aligning with the stock’s average over the last three years.

American Airlines’ revenue of $52.8 billion in 2023 reflected an 8% y-o-y rise led by capacity expansion as well as marginally better yields. The company’s adjusted operating margin more than doubled to 7.6% in 2023 versus 3.7% in 2022. This can partly be attributed to a 16% fall in the average fuel price for the company. Higher revenues clubbed with margin expansion resulted in adjusted earnings of $2.65 per share, up 5x y-o-y. Looking forward, American Airlines expects its 2024 bottom line to be in the range of $2.25 and $3.25 on an adjusted basis. Although there are near-term headwinds for American Airlines with higher fuel prices and lower yields, it has some positives to look forward to, including its plans to expand capacity and reducing its debt. The travel demand also remains robust. Overall, we believe that investors can use the current dip as an opportunity to pick AAL stock for gains in the long term.

[1] Returns as of 3/14/2024
[2] Cumulative total returns since the end of 2016

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