American Airlines Group Inc

NASDAQ:AAL   3:59:59 PM EDT
17.93
+1.31 (+7.88%)
4:48:58 PM EDT: $17.95 +0.02 (+0.11%)
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Why American Airlines Stock May Be a Buy

Fundamentals

##Symbol## AAL

Many of the top airline stocks are suffering from an ugly report published by the AP that the Justice Department is investigating whether airlines colluded to fix prices. The DOJ is investigating if airlines have removed unprofitable routes and tried to slow down growth in order to prop up the prices of airfares all the way back since 2008. That along with increased capacity (more flights) from the entire industry has violently changed the landscape from one of a "good" perfect storm with dropping fuel prices and increased demand (prices), to a "bad" perfect storm with increased slack (capacity), competition and dropping prices.

But, this change may in fact be a unique opportunity to examine a bullish thesis on a segment that isn't trading at all-time highs, rather than continually looking to diversify into sectors that are at full throat valuations.

American Airlines does in fact have the largest revenue over the trailing-twelve-months (TTM) than any other airline in North America. If we plot the mega caps in this industry with revenue (TTM) on they-axis and equal space (rank) the x-axis, we can see this reality rather plainly.


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AAL has seen revenue (TTM) rise over both one- and two-years by 38.65% and 70.50%, respectively. Although the fundamentals aren't perfect, they are quite strong and point to a compelling investment thesis even though the technicals are collapsing (one-bull rating).

The average estimate for next quarter's revenue of $11,015.9 million is above last quarter's $9,827.0 million.

Technicals   |   Support: 28.58   |   Resistance: 43.03   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

AAL has a one bull (lowest rated) technical rating because it's trading below the 10-day (short-term), 50-day (medium-term) and 200-day (long-term) moving averages.


Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
EARNINGS ESTIMATES
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-07-23 $2.62 $11,015.9 M $10,866.5 M $9,827.0 M Provided by ZACKS


Let's look at the core elements that drive the company's fundamental rating.


Fundamentals Rating Summary



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 42,482 30,640 24,916 RISING

Operating Margin (QTR) 1.184 1.06 1.02 RISING

Net Income (TTM US$ Millions) 3,334 -1,013 -557

Levered Free Cash Flow (TTM US$ Millions) -649 1,531 -1,153 FALLING

Capital Expenditures (TTM US$ Millions) 5,673 3,276 2,535





Stock Returns and Chart

AAL is down -22.6% over the last three months and down -27.2% over the last six months. The stock has returned -11.0% over the last year. We can see the stock is in a controlled "free fall."

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 42,48230,64024,916RISING


Note that AAL is growing revenue by 38.65% year-over-year. Any number over 20% has an added impact on the fundamental (star) rating. The company is just off its all-time highs in revenue and stands apart from the rest of the industry with the largest revenue in the last year.

What do all these numbers mean?
AAL's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Operating Revenues/Operating Expense 1.1841.061.02RISING


Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter AAL showed a ratio of 1.18, which is the highest level the company has ever reached. Further, assets (in the orange line) are also at all-time highs.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.06. In the last year we can see operating margins are increasing and are also currently greater than 1.0 (the critical level).

AAL's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was positive (raises the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 3,334-1,013-557


With revenue booming and operating margins at all-time highs, it's almost a tautology that earnings are rising. Net Income (after tax profit) over the trailing twelve months (TTM) for AAL is not only rising, its trending higher (has risen for at least five consecutive quarters) and is now at an all-time high. The company had never broken $1.5 billion in earnings and now stands above $3 billion. This massive increase is a part of the strong four star rating.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Levered Free Cash Flow (TTM US$ Millions) -6491,531-1,153FALLING


If you recall at the top of this article we stated that fundamentals were "almost" perfect. The fly in the ointment is a non-trivial one, namely levered free cash flow (FCF) (TTM US$ Millions). This metric is a critical determinant of stock price since market cap is the present value of all future free cash flows. For AAL the metric is falling (it was $1.5 billion last year). For the most recent trailing-twelve-months the company reported Levered Free Cash Flow (TTM US$ Millions) of -$649 million.

This cash metric is up $504 million from $-1,153 million two-years ago but it's down and negative this year.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note the falling bars from a year ago (four quarters ago).



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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Capital Expenditures (TTM US$ Millions) 5,6733,2762,535


Perhaps the prettiest trend for AAL is capital expenditures (CapEx) (TTM US$ Millions). The measure is trending higher meaning that for at least five consecutive quarters, it's been rising. CapEx is up 73% year-over-year and now stands at an all-time high. If we see CapEx at all-time highs while earnings are also at all-timehighs, that signals healthy (and successful) investment in the company. Further, we can see that CapEx today relative to two-years ago is up 124%.

In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars. Note the rising bars from one-year ago.


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Summary
The airline sector in particular has been hit hard. recent notes have covered Southwest (LUV) and Jet Blue (JBLU). We recommend those reads as well.

AAL does represent a unique opportunity in and of itself as it has the largest revenue of any airline while realizing its highest operating margins, assets and net income ever. The DOJ investigation could be good, bad or ugly. The increased capacity in the industry is not a "maybe," it's a "for sure," and that will have a downward effect on prices. There's reason for the airlines have come rather significantly off of their highs, but there is also a compelling investment thesis surrounding the segment, and specific companies examined one-at-a-time as well. AAL is one of those compelling companies.