Is American Airlines Group Inc’s (NASDAQ:AAL) PE Ratio A Signal To Sell For Investors?
American Airlines Group Inc (NASDAQ:AAL) trades with a trailing P/E of 11.8x, which is higher than the industry average of 10.9x. While AAL might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for American Airlines Group
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for AAL
Price-Earnings Ratio = Price per share ÷ Earnings per share
AAL Price-Earnings Ratio = $43.3 ÷ $3.667 = 11.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AAL, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since AAL’s P/E of 11.8x is higher than its industry peers (10.9x), it means that investors are paying more than they should for each dollar of AAL’s earnings. As such, our analysis shows that AAL represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your AAL shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to AAL, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with AAL, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing AAL to are fairly valued by the market. If this does not hold, there is a possibility that AAL’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in AAL. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for AAL’s future growth? Take a look at our free research report of analyst consensus for AAL’s outlook.
Past Track Record: Has AAL been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of AAL’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks 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.
