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Here's Why Investors Should Avoid American Airlines Stock

Zacks Equity Research
·4 min read

Shares of American Airlines AAL have had a disappointing run on the bourse since the beginning of March, shedding 34.2% of value, wider than the  industry's depreciation of 24.1%.

Why the Dismal Price Performance?

Coronavirus-induced travel-demand woes have been the biggest bane for the American Airlines stock. The sharp drop in air-travel demand is hurting passenger revenues, which comprise majority of its top line. The carrier incurred a loss in each of the first two quarters of 2020, mainly due to the 57.5% decline in passenger revenues in first-half 2020. American Airlines expects its system capacity for the September quarter to nosedive nearly 60% on a year-over-year basis.

The carrier’s decision to suspend several flights in October with the expiration of the CARES Act terms on Sep 30 raises concerns about its prospects. Continued weakness in air-travel demand contributed to this decision. Notably, the carrier plans to call off flights to 15 U.S. airports in the month.

American Airlines’ liquidity position is also unimpressive. Notably, the company's total debt-to-total capital ratio stood at 1.11 at the end of the second quarter, much higher than the industry’s average of 0.76. A higher ratio implies that a company is highly leveraged with a higher risk of insolvency. Moreover, its current ratio was pegged at 0.77 at the end of the June quarter. A current ratio of less than 1 (current liabilities exceeding current assets) is not desirable as it indicates that the company may have problems meeting its short-term obligations. Moreover, American Airlines agreed to borrow up to $5,477 million from the United States Department of the Treasury to combat the coronavirus woes. This hefty loan might worsen its debt profile.

Other Headwinds

The Zacks Consensus Estimate for current-year bottom line has widened to a loss of $19.25 from $15.16 90 days ago. Such an unfavorable estimate revision reflects the brokers’ lack of confidence in the stock.

Given the wealth of information at the brokers’ disposal, it the best option of investors to be guided by their expert advice and the direction of their estimate revisions. The stock currently has a Zacks Rank #4 (Sell) and a Momentum Score of F, which further highlight its short-term unattractiveness.

The industry to which American Airlines belongs, currently has a Zacks Industry Rank of 237 (of 250 plus groups). Such a bearish rank places the company in the bottom 6% of the Zacks industries. Studies show that 50% of a stock price movement is directly related to the performance of the industry group it hails from.

Stocks to Consider

Investors interested in the broader Transportation sector may consider J.B. Hunt Transport Services JBHT, Knight-Swift Transportation Holdings KNX and Werner Enterprises WERN. While J.B. Hunt and Knight-Swift presently carry a Zacks Rank #2 (Buy) , Werner sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of J.B. Hunt, Knight-Swift and Werner have gained more than 36%, 29% and 28%, respectively, on a year-to-date basis.

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