Shares of American Airlines (AAL) have had a stellar run in 2023 so far. This is due to the continued recovery in the pent-up demand post-pandemic, impressive results and lower fuel costs.
As of yesterday’s close, the stock is up more than 46% year to date (YTD). AAL is up 0.5% today after its competitor, Delta Airlines (DAL), reported record quarterly results this morning.
After such an impressive run, will AAL continue to rally in the second half of the year? Or will the share price performance hit some turbulence?
About American Airlines
Founded in April 1926, Fort Worth, TX based American Airlines is one of the largest airline operators globally. As of 2023, it is the largest airline in the world by passengers carried and revenue passenger miles. Notably, its extensive network operates roughly 6,800 flights per day to about 350 destinations in 48 countries.Meanwhile, a report by database company Statista stated that between February 2022 to January 2023, American Airlines had the highest domestic market share among US airlines at 17.5%, followed by Delta (17.3%) and Southwest Airlines (16.9%).Solid Results and Upbeat Management Commentary
A compelling case that can be made for the continued rise in American Airlines stock in the second half of 2023 is its robust results for the latest quarter.Not only did the airline company report a 37% yearly rise in operating revenues to $12.2 billion in the Jan - Mar ‘23 period, it reported a profit of $10 million compared to a mammoth loss of $1.64 billion in the same period a year ago.The company’s improved results can be attributed to the more than 476,000 flights operated in the first quarter with an average load factor of 80%. Load factor is a critical metric for airlines which measures the percentage of seats occupied by passengers on a particular flight or across an entire airline's operation. Meanwhile, the company’s operational strength can be gauged from the fact that in Q12023, it generated operating cash flows of $3.3 billion which denotes a blowout growth of 181.3% from the prior year. Unsurprisingly, such solid cash flow generating capability has resulted in the company paring its debt substantially by $850 million in the quarter. Moreover, the management emphasized that it is well on its way to achieving its goal of reducing total debt by $15 billion by 2025.Moreover, the company also reiterated its full-year 2023 adjusted earnings per share forecast of $2.50-$3.50 per share. Yet, it expects to report EPS between $1.20 and $1.40 in the second quarter which is lower than the consensus forecast of $1.56.However, a slowdown in revenues from the cargo segment by almost 39% from the previous year to $223 million remains a concern. Further, a yearly jump of 27% in fuel costs, which is considered to be the major cost for an airline, to $3.2 billion can act as a headwind for the company’s profitability. Although fuel costs have largely remained stable, even somewhat on a downward trend, any adverse geopolitical development or supply constraint can throw a spanner in the works for the airline industry.Valuation ComfortAmerican Airlines stock is trading at comfortable valuation levels compared to its peers.With a PE of 7.30, it is much lower than the PE of Southwest Airlines (LUV), 38.71, and Delta Airlines 16.40, even United Airlines (UAL) has a higher PE at 9.69.In terms of another key valuation metric which is the Price-to-Sales (PS) ratio, American Airlines stock appears to be undervalued.While Southwest Airlines, United Airlines and Delta Airlines have a PS ratio of 0.94, 0.38 and 0.58, respectively, American Airlines’ PS ratio is a mere 0.23.Analyst EstimatesHowever, even with comfortable valuation levels and decent results, analysts are projecting a decline in earnings estimates for American Airlines in FY 2024.
Analysts have a “Hold” rating on the stock with mean price target of $18.69, indicating limited upside potential from current levels. Notably, out of 12 analysts covering the stock 2 have a “Strong Buy” rating, 9 have a “Hold” rating and 1 has a “Moderate Sell” rating.
Final TakeawayAmerican Airlines' share price performance has been quite impressive year-to-date.Which may seem to be surprising as its decent balance sheet position, operational strength, reporting of profits in the latest quarter from a loss in the same period last year, leading market share and relative valuation comfort all allude to the fact that its stellar share price performance in the first half of 2023 should continue in the second half too.However, analysts, as can be gauged from their caution above, perhaps are a bit sceptical of the sustenance of the American Airlines share price rally in the second half of 2023. Moreover, not only American Airlines, the whole industry’s vulnerability to any negative impact of a rise in fuel prices can also derail the share price growth.All in all, I believe that the rise in American Airlines' share price is expected to continue in the second half of 2023. Although the rise in the stock price may not be as acute as it was in the first half (due to the probable rise in oil prices), its robust fundamentals and the persistence of demand especially considering the upcoming holiday season are likely to support the share price growth.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
