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American Airlines at 52-Week Low: Does It Still Hold Promise?

Zacks Equity Research

Shares of American Airlines AAL have been in the red territory for a while now. This is evident from the stock’s price trend year to date. American Airlines has lost more than 23% compared with its industry’s 0.8% decline.

In fact, shares of this Fort Worth, TX-based carrier decreased more than 20% in the past month. The stock closed at $24.45 yesterday (Aug 27), after hitting a 52-week low of $24.32 during the course of the trading session.

While this Zacks Rank #3 (Hold) company is currently bearing the brunt of issues like the Boeing 737 MAX groundings and labor unrest, we believe that it still holds much promise and should be retained for long-term prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

What’s Hurting the Stock?  

American Airlines, which has 24 Boeing 737 MAX jets in its fleet, expects the jets to remain grounded until Nov 2. This will result in the cancellation of multiple flights per day. Notably, operations at United Airlines UAL and Southwest Airlines LUV have also been hurt due to the groundings as these companies too have Boeing 737 MAX jets in their respective fleets.

American Airlines expects its current-year pre-tax earnings to be affected to the tune of roughly $400 million. For 2019, it expects unit costs (excluding fuel and special items) to increase in the 3.5-4.5% range (previous guidance was in the 2-3% band). The increase in the cost projection can be attributed to the reduction in capacity following the grounding of American Airlines’ 737 MAX fleet.

Additionally, American Airlines is at loggerheads with the unions representing its mechanics. Negotiations between the parties have been continuing ever since the contract became amendable in December 2015.However, a new contract has not been signed yet.

American Airlines accused the unions of wilfully slowing down work to gain leverage in the contract talks. The carrier blamed the unions of causing more than 900 flight cancellations over the last two months and sued them in May. The ruling in August was in favor of the company. It ordered the mechanics not to disrupt operations.

The dispute has invited political attraction, with multiple members of Congress writing a letter to American Airlines and the unions in August.

Downward Estimate Revisions

Due to the above-mentioned headwinds, the Zacks Consensus Estimate for the company’s third-quarter earnings has moved 10.1% south over the past 60 days. Also, the reading for the current year has been revised 1% downward over the same time frame.

Hopes for a Turnaround

Despite the headwinds, American Airlines does have its share of positives. For instance, American Airlines, like most other airline players including Delta Air Lines DAL, is being aided by the strong demand for air travel. The company's performance with respect to unit revenues is also encouraging. For the third quarter of 2019, it expects total unit revenues to grow in the 1-3% range. Pre-tax margin, excluding special items, is projected in the 5.5-7.5% band for the third quarter.

The company's efforts to expand operations are appreciative as well. In this regard, its decision to expand the European footprint is noteworthy. In July, American Airlines’ initiatives to strengthen its foothold in the Oceania region received a boost when the U.S. Department of Transportation approved its joint venture with Australia’s leading carrier — Qantas Airways. We are also impressed by the company’s efforts to reward its shareholders through share buybacks and dividend payments.

Moreover, the stock has expected earnings per share growth rate of 16.7% for three to five year, which is higher than its industry’s 16.5%. American Airlines also has an attractive VGM Score of A. Here V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores.

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