With hubs across several cities, including  Chicago, Dallas, Los Angeles and Miami, American Airlines Group, Inc. (AAL) has witnessed a partial recovery in its business thanks to an accelerated mass vaccination drive, which has restored people’s willingness to travel. As a result, AAL’s stock hit its $26.09 52-week high on March 18. However, the stock has retreated  5.2% over the past month and is currently trading 19.1% below its high on concerns over its weak financials in its  last-reported quarter.

Furthermore, the company’s alliance with JetBlue Airways Corporation (JBLU) is under regulatory scrutiny, and the airline is also facing stiff competition from its peers. Investors’ confidence in AAL was further swayed by an emergency declared by one of its  Boeing 737 MAX aircraft bound for New Jersey’s Newark Liberty International Airport in March. The flight’s captain declared an emergency and shut down one engine in response to a possible mechanical issue.

Here are the factors that we think could influence AAL’s performance in the coming months:

Ongoing Antitrust Investigation

AAL and JBLU have launched a codeshare agreement, began ticket sales for dozens of new routes, and optimized their schedules for  additional routes out of New York and Boston over the past few months as part of their alliance, which was formed last July.

However the Department of Justice (DoJ) has ramped up its antitrust probe of the two airlines’ partnership. It is concerned that the  deal could lead to anticompetitive coordination and inflated fares at key traffic hubs. The investigation is ongoing, and no conclusion has yet been reached. The outcome of the investigation could significantly affect AAL’s performance.

Weak Financials

The company’s total operating revenues declined 52.9% year-over-year to $4 billion for its  fiscal year 2021 first quarter, ended March 31, 2021. This was driven primarily by a 39.2% year-over-year decline in total available seat miles (ASMs). AAL’s passenger revenue per ASM decreased 31.9% and its total revenue per ASM declined 22.6% year-over-year for the quarter.

AAL’s operating loss in the first quarter was  $1.32 billion. The company’s net loss for the quarter came in at $1.25 billion compared to a $2.24 billion net loss in the prior year period. Its adjusted net loss per share came in at $4.32 compared to $2.65 in the fiscal 2020 first quarter ended March 31, 2020.

Consensus Price Target Indicates Downside

AAL is currently trading at $21.11, and Wall Street analysts expect the stock to hit $17.75 in the near term, which indicates a potential decline of 15.9%.

POWR Ratings Reflect Bleak Outlook

AAL has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. AAL’s D grade for Value also affirms its bleak outlook. In terms of its trailing-12-month EV/S, the stock’s 3.70x is 69.9% higher than the 2.18x industry average.

The stock has a D grade for Growth also, which is consistent with analysts’ expectations that its EPS will remain negative for the coming quarters.

 AAL has an F grade for Sentiment, which is in sync with unfavorable analyst sentiment.

In addition to the grades we’ve just highlighted, we’ve rated AAL for Stability, Momentum, and Quality as well. Get all AAL ratings here.

AAL is ranked #24 of 28 stocks in the F-rated Airlines industry.

Better than AAL: Click here to access three top-rated stocks in the same industry.

Bottom Line

Even though the airline industry seems to be on a path of recovery, it’s expected to take a long time before its business  returns  to pre-pandemic levels. As a result, we think it’s wise to avoid AAL until its financials improve  and it hits  a valuation that  justifies its growth potential.  

AAL shares were trading at $21.76 per share on Monday morning, up $0.65 (+3.08%). Year-to-date, AAL has gained 37.98%, versus a 12.18% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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