Fort Worth, Tex.-based American Airlines Group Inc. (AAL - Get Rating) operates primarily as a network air carrier, providing scheduled air transportation for passengers and cargo. After a dismal pandemic year, the airline industry is rebounding with increased leisure travel afforded by  the success of a solid, nationwide, vaccination drive. AAL President Robert Isom told investors, “We expect a lot of passengers, tremendous pent-up demand, especially as vaccinations take hold and infection rates decline, and we’re going to be ready. We have to get ready for the holidays always.”

AAL reported a narrower than expected loss in the third quarter of 2021. However, high fuel and labor costs could derail efforts by most U.S. airlines to return to profit. Also, analysts expect AAL to face labor shortages and high costs. AAL is struggling with operational issues and staffing challenges, canceling hundreds of flights for a fourth straight day on November 2.

Shares of AAL have gained 75.3% in price over the past year and 25.4% year-to-date to close yesterday’s trading session at $19.83. However, the stock is trading below its 50-day and 200-day moving averages.

Here’s what could shape AAL’s performance in the near term:

Lower-Than-Industry Profit Margins

AAL’s 0.71% Capex/Sales ratio  is 71.2% lower than the 2.45% industry average. Also, its 0.37% asset turnover ratio is 52.4% lower than the industry average. The stock has gross profit  and EBIT margins of negative 3.44% and 27.23%, respectively.

Furthermore, AAL’s 4.73% and 11.13% respective ROA and ROTC compare with the 4.96% and 6.49% industry averages.

Undervalued at the Current Price Level

In terms of forward EV/Sales, AAL is currently trading at 1.51x, which is 22.5% lower than the 1.95x industry average. Also, its 0.43 forward Price/Sales ratio is 73.1% lower than the 1.61 industry average.

Mixed Analysts’ Expectations

Analysts expect AAL’s revenues to increase 125.8% in the current quarter and 70.1% in the current year. Also, its revenue is expected to increase 47.5% year-over-year to $43.49 billion in the following year. The company’s EPS is expected to grow 54.9% in the current  quarter, 71.8% in the next quarter, and 56.6% in the current year. However, its EPS is expected to remain negative at least until the following year.

Of  the eight Wall Street analysts that rated the stock, two rated it Buy, two rated it Hold, while four rated it Sell. The $18.79 median price target indicates a potential 5.2% downside from its last closing price.

Solid Third-Quarter Earnings Report

AAL’s total operating revenues increased 182.7% year-over-year to $8.97 billion in its fiscal third quarter, ended September 30. Its operating income stood at $595 million, up 120.7% from the same period last year. And its adjusted net loss came in at $641 million, indicating a 77.3% decline  from its  year-ago value. The company’s loss per share decreased 82.1% year-over-year to $0.99.

POWR Ratings Reflect Uncertain Prospects

AAL has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of C for Momentum. This is justified because AAL stock gained significantly in price over the past year but is trading below its 50-day and 200-day moving averages.

AAL also has a D grade for Stability, in sync with its beta of 1.71.

Of the 31 stocks in the F-rated Airlines industry, AAL is ranked #10.

Beyond what I have stated above, one  can view AAL’s grades for Quality, Growth, Sentiment, and Value here.

View the top-rated stocks in the Airlines industry here.

Bottom-Line

The airline industry is recovering gradually with solid progress on the vaccination front and increased leisure travel. However, AAL is currently struggling with operational disruptions and elevated costs. And given the company’s  lower-than-industry profit margins and weak bottom line, its  stock’s near-term prospects look uncertain. Thus, we think investors should wait for the company to improve its financials before investing in the stock.

How Does American Airlines Group Inc. (AAL) Stack Up Against its Peers?

While AAL has an overall POWR Rating of C, one  might want to consider taking a look at its industry peers, SkyWest, Inc. (SKYW - Get Rating) and China Southern Airlines Company Limited (ZNH - Get Rating), which have a B (Buy) rating.

AAL shares rose $0.04 (+0.20%) in premarket trading Wednesday. Year-to-date, AAL has gained 25.75%, versus a 24.75% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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