Buying AAL shares is betting on a rhythm of gains
- American airlines (AAL) the stock rebounded from a low in March
- Analysts bet it beats estimates later this month
- Debt, debt, debt
American airlines (NASDAQ:AAL) the action took off in mid-March. The shares were expected to open at $18.16 on April 4, 40% higher than they were on March 7.
An indication of that future comes when American releases its first quarter later this month. A loss of $2.50/share is expected. Beat him easily and the bulls will run.
|AAL||American Airlines Group Inc.||$17.86|
Bulls see a clear sky
There are some facts about airline stocks which are not disputed.
Demand is returning to airports. TSA traffic counts showed 2.2 million passengers traveled by air on April 3. In 2019 the number was 2.46 million.
There seems to be a huge pent up demand. The prices are climb with kerosene costs and people don’t complain about it. They complain about other things, like flight cancellations and high load factors. But they seem desperate to get back to normal.
That means American could easily top its revenue estimate of $8.45 billion. That would be more than double the revenue from a year ago. In 2019, American had revenue of $45.7 billion and net income of $1.4 billion, $3.10/share.
American also changed its CEO this month. Robert Isom is the new boss, replacing Doug Parker. There’s always a warm glow to a change in direction, even if experienced analysts aren’t expecting much.
Bears see big debts
In general, analysts have yet to look back on AAL stocks. Tipranks counts only one bull among the 14 who follow him, with three sellers.
A look at the airline’s balance sheet shows the problem. American took on more than $13 billion in new debt as it struggled to survive the pandemic. It had $42.2 billion in debt at the end of 2021, for $13.4 billion in cash.
Part of this debt bears a coupon rate of 11.75%. Even notes bearing a rate of 3.75% are still sell below par. They rebounded from a low of 0.82 in February but are only asking for 0.92 today. This is still an effective rate of more than 4%. Fitch recently confirmed the airline’s credit rating at B- but stable.
I warned investors to steer clear of America in December 2020 when its price was close to its current level. Its market capitalization is now $11.6 billion, barely a quarter of its debt level.
There are two ways companies raise money, and debt is just one of them. The other is to sell more shares, diluting existing shareholders. American has added 200 million new shares since the end of 2019, an increase of almost 50%. Our Faisal Humayun fears that another capital increase may occur. This could wipe out recent gains for current shareholders.
The essentials on AAL shares
American Airlines stock is not yet an investment, except for very aggressive buyers.
At best it is speculation. This is a way for you to act on the economic temperature. Over the past year, US stocks have traded as high as $24/share and as low as $12. Options through the end of the month show substantial interest at $20 by the end of Aprilindicating that it is due for a gain of 10%.
But America has a long, long way to go before it gets back to normal. Even beating 2019 earnings won’t make a big dent in that debt. As a long-term investor, I believe there are easier ways to make money, even in the airline business. Consider the debt of South West Airlines (NYSE:LUV), excluding capitalized leases, is now below its 2021 revenue.
If you want to hold a normal airline stock, buy a normal-looking balance sheet.
As of the date of publication, Dana Blankenhorn did not hold any positions at the companies mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.