American Airlines Group Inc (AAL) Is Trading At A 28.18% Discount To Its Intrinsic Value
In this article I am going to calculate the intrinsic value of American Airlines Group Inc (NASDAQ:AAL) using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in December 2017 so be sure check the latest calculation for American Airlines Group here.
What’s the value?
I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I pulled together the analyst consensus estimates of AAL’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 10.45%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $9,775.1M. Want to understand how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how AAL’s earnings are expected to move in the future, which should give you an idea of AAL’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes $22,871.9M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $32,647.0M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $68.23, which, compared to the current share price of $49, we find that American Airlines Group is about right, perhaps slightly undervalued at a 28.18% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For AAL, I’ve compiled three important aspects you should further examine:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
