This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About American Airlines
Let’s keep the “American” trend going shall, we?
Ok, first of all, you already know we don’t like airline stocks.
Like at all.
Airlines perform essential tasks and get individuals to where they want to or need to be in a timely, and far more often than not safe manner and we appreciate that, however, as prospective investors in the companies we analyze, we have to keep it as real and as objective as possible, and the fact of the matter is that airlines have a lot of internal and external, controllable and uncontrollable business stress points that frankly stress us out.
For starters, there is a major pilot shortage both in the United States and in other countries as well (leading to certain airlines cutting operations and revenue generating routes while simultaneously helping prospective aviators financially in obtaining their licenses and also better compensating their current crews, which is a large cost for said operators), airlines have seemingly become increasingly sensitive to fluctuations in the price of oil, having to at times cancel flights and compensate passengers (hurting their bottom line) while feverishly trying to put them on another flight, which might just mean attempting to or forcibly bumping someone else off of another flight (among other stress inducing scenarios), not to mention the facts that it is all too common for airline pilots to unionize and refuse to fly until the airline they fly for coughs up some better forms of compensation, and, oh yeah, weather can be an absolute pain in the butt, being one of the largest stressors induced on airlines and their passengers, and, of course, it also happens to be the least controllable element of the entire equation as well, just to name a few.
So, yeah, airlines are extraordinarily cost-intensive and for those reasons, challenging to invest in, not to also mention that COVID-19 and the following onset and rise of remote work has most definitely generated a copious amount of question marks regarding demand for air travel in the short, intermediate and long-terms.
Even though these are valid concerns and points, we still want to do our best in taking each and every company (yes, even if that means an airline) as they come, on a rather strict case-by-case basis, as Dallas, Texas-headquartered American Airlines, one of the world’s largest, dominant legacy carriers might just have the stuff that makes us want to seriously ponder an investment in the company through its shares (NASDAQ: AAL).
Now, before delving into the company’s core financials and other relevant figures, it is worth noting that in addition to generating revenue through selling tickets, checking bags, selling in-flight meals and other packages such as airport lounge offerings, it is definitely worth noting that airlines make a lot of their actual profit from the sale of frequent flying miles and through other specialty rewards programs, American’s being their AAdvantage program, partnering with a host of hotels, car rental agencies and other travel-friendly companies (that in turn makes American Airlines money through the sale of such packages to credit card partners and the other previously listed agencies) that partner with American Airlines in keeping customers happy and earning perks they might not have earned otherwise, thus, incentivizing said customers to continue flying with American.
That was an additional but necessary tidbit on American and here is the whole enchilada from a financial standpoint.
American’s stock financials
With a market capitalization of $8.58 billion along with an associated share price of $13.13, American Airlines is also home to a price-to-earnings (P/E) ratio of 5.82 and no annually distributed dividend is issued to its shareholders as of the time of this publication.
In putting some of these initial elements together, American’s stock (NASDAQ: AAL) appears to be grossly undervalued, at least compared to its actual, intrinsic value, given that its price-to-earnings ratio is nearly fifteen points down from the commonly held, fair value benchmark of 20, indicating that one could be picking up an ownership stake in this company at a significant discount.
We like that.
Additionally, it is worth noting that, to us, at least, it makes complete sense that even this large, established company doesn’t issue any form of steady annual dividend, as given the previously mentioned expected and unexpected cash burdens imposed on essentially all airlines daily, it is wise to conserve cash whenever possible and on this front, American’s board of directors has opted to do exactly that.
With respect to the company’s balance sheet, American’s board is also at the helm of and responsible for the strategic deployment of just about $64.7 billion in terms of total assets along with approximately $70.5 billion in terms of total liabilities, which, at face value, is hardly a positive and is actually sort of worrisome, given that it maintains more total liabilities than total assets, and objectively, with respect to some of its most formidable peers such as United, Delta and Southwest, American is the only one in the bunch with a currently total liability-heavy balance sheet structure, which sensibly adds to the concern.
While a good deal of the company’s outstanding liabilities fall under the category of “total long term debt,” in the amount of $32.3 billion, more precisely, this doesn’t bother us as much, however, it can also be found that the company’s total current liabilities are in the amount of nearly $21.5 billion, which, even for American Airlines is a sizable amount of debt to tend to in a relatively short span of time, and we would be lying if we said this wasn’t triggering a sort of vague alarm on our concern radar.
Before making too many assumptions and getting too deep in the weeds with this, however, let’s continue investigating this company’s financials so as to gain a clearer picture and framework of this company.
As it pertains to the company’s income statement, American’s total annual revenues (measured since 2018) have done pretty much what we expected, remaining fairly stable during each and every year, of course, excluding 2020, as this company’s year-over-year (YOY) revenue has found itself in and ever so slightly around the $40 billion zip code, however, during 2020, the company reported revenues of $17.3 billion, cutting the company’s revenue by more than 50% during this time period, which, given just how sensitive air travel and the lodging industry as a whole was (and still is, from our perspective) to an extraordinary health emergency such as COVID-19, was to be expected but is yet another line item as to why we do not typically favor airline stocks.
Nevertheless, the company can only control so much in this respect, and it is a positive that in the couple of years that followed this figure, American Airlines’ YOY revenues did climb back up to their normal cruising altitude of around 40,000 feet.
I mean dollars.
Onto the state of the company’s cash flow statement, American’s net income and total cash from operations have been positive for the most part, however, of course 2020 put the airline industry in a headlock and thus some negative (yet thankfully contained) down years, especially on the net income spectrum, yet, the company’s total cash from operations were still thankfully well insulated, at least for the most part, ranging from its only down year during this era of -$6.5 billion (2020, who would’ve guessed it) to a relative high of $3.8 billion in 2019.
The numbers agree, airlines are a scary place to be when a public health emergency emerges and continues rearing its ugly head.
American’s stock fundamentals
As previously touched on towards the beginning of this stock analysis article, pretty much no one readily expects vast amounts of profitability within the airline sector, especially on a trailing twelve month (TTM) net profit margin basis, as these companies are essentially built to bleed cash through their operations.
Hey, that’s just how it is, you don’t visit our website to hear us sugarcoat.
With that being said, according to the figures displayed on TD Ameritrade’s platform, both American and the industry overall confirm these facts, however, there is a pocket of smooth air in these figures, as the company’s TTM net profit margin stands at 3.04% to the industry’s respective average of 2.54%, both speaking to the low (net) margins of the industry but also a point of attraction for American itself, as the company is seemingly able to out-profit the competition (again, on average), even if not by that much, but especially in such a low-margin industry, every little edge or profitability advantage counts.
On the core TTM returns on assets and investments spectrum, American has once again shown that it has something to prove, as on both of these fronts, the company has handsomely outpaced the industry’s listed respective averages, with, for instance, American’s TTM return on assets listed at 2.43% to the industry’s respective average of -0.14%, implying that the company in question has done a much better job in extracting gains from the assets it deploys than those of its peers.
Should you buy American Airlines stock?
Did we mention that we don’t like airline stocks?
If you didn’t detect our sarcasm, you bet we did.
All things considered, however, we will say that for those that are keen on pondering some portfolio holdings within the sector, American Airlines doesn’t actually appear to be a wretched choice, at least in reference to its recently rebounding year-over-year revenues, its stable (for the most part) cash flows, its comparable TTM net profit margin and returns on assets and investments, but, of course, there are some cons, as we aren’t the largest of fans when it comes to the airline’s total liability-heavy balance sheet, however, at the same time, after gaining some more information and perspective on the company, we don’t think American Airlines is going out of business anytime soon, that is, if ever, or at least until Jesus comes back.
With its competitive margins and inordinately depressed share price, we think, all things considered, it is worth offering this company’s stock (NASDAQ: AAL) a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.