American Airlines (NASDAQ: AAL) might be too big to fail, but are they too damaged to recover. Investors are banking on the pent-up passenger demand, stimulus packages, and government bailouts to trigger a long-term bullish recovery. However, nightmarish financials, the transition from corporate travel to internet communication, and record low passenger levels make a turnaround unlikely.
Table of contents
- How will the digital economy affect AAL?
- Are analysts bullish or bearish?
- How long will AAL’s financial destruction go on?
American Airlines stock predictions – Digital economy
The devastating long-term effects of a digital economy on the airline industry will likely make AAL bearish. Most airlines, including AAL, make their money off the expensive tickets, above economy, that the businessman purchase. However, the recent spike in Zoom, Cisco, and Google Hangout threatens the bottom line of AAL. Because companies will beg the question, why are we paying to send executives oversees/interstate when they can communicate over the internet.
Furthermore, the reduction in prices for low-cost flights may stimulate temporary demand but is not good for long-term profitability. Because low-cost travel is now AAL’s primary source of revenue, as the digital age scars away high corporate flyers. Not to mention, the current unemployment levels will see leisure travel fall to the bottom of households to-do lists. Thus, cheaper flights on AAL’s primary revenue sources will affect their bottom line month by month. The massive YoY disparity in travel numbers between 2020 and 2019 highlights the bleak financial future. For example, the total number of passengers on Thursday was 855,908, which was down 65% YoY.
What are AAL Analysts expecting?
At large, analysts hold a negative outlook on American Airlines. Analysts are forecasting EPS and sales for Q3 to come in at -$5.82, and $2.9 billion, respectively. Despite the projections being higher than Q2, they are still significantly lower than Q1 2020 and FY 2019. Thus, analysts urge investors to look at YoY growth as opposed to quarterly growth.
According to Market Watch, AAL analysts are recommending investors to sell (8 out of 20) or at minimum hold (7 out of 20) their shares. It is important to note that bearish sentiment is growing among analysts. For example, the average recommendation rating fell from hold to underweight over the past month. Moreover, analysts are continuing to lower their price targets. For instance, Berenberg bank knocked their price target from $14 to $10 over the last month. The price target bleeding is infecting AAL’s 12-month forecast, which is currently $10 (median). If the price forecasts are correct, then investors who bought shares on Friday would suffer a 23.1% loss over the next year.
American Airlines stock predictions – Financials
American Airlines is turning around financially but is still showing serious fundamental flaws. Areas that are showing promise include earnings and cash burn.
Naturally, after travel demand picks up and AAL reduces overhead costs, earnings should increase. According to eight analysts, AAL’s earnings are approaching an inflection point, which should be achieved by Q4. In which, earnings would begin showing quarterly growth. AAL is unprofitable, which means its cash burn rate is its worst enemy. Management is successfully reducing its cash burn rate. For example, “the company’s cash burn rate in the June quarter was nearly $55million per day, comparing favourably with its previous forecast of $70 million per day“. The management’s underlying objective is for AAL to have a cash burn rate of zero by December. If successful, AAL’s earnings would turnaround, which supports the analysts forecasts above.
The first red flag is unprofitability. Analysts forecast AAL to remain unprofitable until June 2022. Investing in AAL while it lacks profitability could be a huge gamble. Because red earnings suggest, the business model is not favourable to the market environment. Not to mention negative earnings makes it difficult to compare AAL’s P/E ratio to the market. Also American Airline’s debt levels are concerning to the point where it has negative shareholder equity. Thus, despite the positives above AAL still exhibits gaping holes in its financial position.
YIG Takeaway on the American Airlines stock predictions
Before I begin, I remind our viewers that this is not financial advice. Instead, the information above is investment commentary from extensive research.
Overall, AAL remains beaten up from the pandemic, hence why the airline is at a discount. Investing while AAL is low is not an issue. The major problem is will investors be able to sell for a profit in the future. A digital economy will force AAL to change the revenue part of their business model. Government bailouts and cheaper prices for low-cost flights are only bandaids for AAL’s revenue crisis. Especially as the total number of passengers is at nightmarish lows. Therefore, American Airlines might be too big to fail but are they too damaged to recover. If yes, allocating your capital to investments that are poised to grow off the digital economy might be a smarter play.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.