American Airlines Looks Attractive

American Airlines (AAL) isn’t the best in the business.

It’s not the brand you look to for innovation or customer service excellence.

The company’s exposure to international markets has been a liability.

No one wants to own this stock…

And that’s exactly why we like it.

Investing isn’t always about buying the best business out there. It’s about making money.

And despite American Airlines’ headwinds, shares have gotten too cheap.

With most airlines reporting numbers this month, AAL came in #X on the list of top airline stock searches by financial pros.

That tells us that there is some interest in the company.

And we want to make our case.

American Airlines Business

Like most airlines, American suffered greatly when Covid ground economies to a halt.

The company took on heavy amounts of debt to keep the company in business.

Since then, management has focused on operational recovery and efficiency.

To give you an idea of the decline, in 2020 American saw a 69.3% decline in passengers.

The company operates 855 mainline aircraft while regional airline subsidiaries and 3rd party regional carriers operate an additional 544 jets. American services 81 international destinations in 28 countries, with 350 destinations in total.

Additionally, the company operates a sizable cargo unit as well.

American Airlines’ latest corporate report demonstrated a remarkable recovery in all lines of business.

Everything improved from total passenger counts to revenue per passenger, while operating costs per mile declined.

At the same time the company kept its fleet fairly level with few additions. This is important and we’ll discuss it in the financials below.

Lastly, we want to highlight the revenue recovery outlined by the company.

At the moment, business is the only category lagging. There is an open question as to how long it will take to recover given the new dynamics of our work environments. 

However, even if it takes a while, we do expect it to fully recover over the next several years.

Financials

Outside of noting the revenues pre-pandemic, we want to focus on the operating and free cash flows.

Free cash flow is operating cash flow plus capital expenditures, such as planes.

We want to highlight management’s prudence in keeping capital spending to record low levels.

While we do expect this to increase as business ramps up, it’s important to control so they can pay back the heavy debt loads, which currently sit at $36 billion.

This is helped by the younger fleet the company went after.

Based on our math, we believe the company can generate close to $500m-$1b per quarter in cash before CAPEX, which we expect to only be around $100m per quarter.

That gives the company plenty of room to decrease debt over the coming years.

Valuation

Speaking of years, current P/E metrics don’t say much about the company.

However, looking forward, estimates for 2023 earnings are $2.57 with 2024 at $5.08.

That puts the forward P/Es at 6.73x and 3.41x, which is stupid cheap.

Our Opinion – 10/10

We’d offer more valuation measures, but this story is really a recovery question.

Since American Airlines isn’t likely to go out of business, and the world will normalize, earnings should return to pre-covid levels at some point in the next 5 years.

That might seem like a long time. But, that would imply upside of nearly 100% over the same period.