American Airlines Group Inc (AAL)

[rockland2u]

Sent: Wednesday, July 09, 2014 7:26 PM
Subject: [FANews] Why American Airlines Could Gain 40%

Here’s Why American Airlines Could Gain 40%
By Ben Levisohn

How much higher can American Airlines (AAL)? After today’s June-results announcement, Imperial Capital’s Bob McAdoo and Scott Buck think American Airlines could gain more than 40%. They explain why:

We are increasing our 2Q14 and CY2014 EPS estimates to reflect updated management guidance. Prior to the market open on 7/9/14, American Airlines released updated guidance for 2Q14 and full year 2014. Second quarter unit revenues (PRASM) growth is expected to be between 5.5% and 6.5%. This is tightening of management’s previously issued PRASM guidance range, on 6/9/14, which indicated PRASM growth of 5.0% to 7.0% vs. 2Q13. Cargo and Other revenues are also expected to be modestly better than our previous 2Q14 estimate. Pre-tax margin during the quarter is expected to be between 12.0% and 13.0%. This is above our previous expectation for pre-tax margins of 11.4%. As a result of the updated 2Q14 guidance, we are increasing our 2Q14 EPS estimate to $1.94 from $1.73. We are also increasing our full year 2014 EPS estimate to $6.14 from $5.75

American Airlines remains one of our top picks in the sector. We are maintaining our Outperform rating and raising our one-year price target to $58 from $55. We expect the new management team to continue to make structural changes to legacy AMR operations, which should extend earnings upside beyond the benefits of traditional merger synergies, in our view. These trends appear to be evident in the company’s most recent investor update on 7/9/14 that highlighted improving unit revenues and expanding pre-tax margins. With operational efficiencies approaching that of Delta Air Lines (DAL), we believe shares warrant a similar multiple. Our price target represents about 44% potential upside from the recent share price.

American Airlines trades at 6.7 times forward earnings, according to Yahoo! Finance, while Delta Air Lines trades at 10.2 times.

Shares of American Airlines have gained 3.1% to $41.50 at 10:58 a.m. today, while Delta Air Lines has risen 1.2% to $36.90. Even after today’s rise, American Airlines would still have to gain 40% to hit McAdoo and Buck’s $58 target.

http://blogs.barrons.com/stockstowatchtoday/2014/07/09/heres-why-american-airlines-could-gain-40/