American Airlines Group Inc: Why You Should Avoid AAL Stock
AAL stock is tanking in bad times and muddling through in good times
By Lior Alkalay, InvestorPlace Contributor | Apr 4, 2016, 10:15 am EDT
Airline travel, nowadays, has become exceedingly commonplace. No longer is there a need for a travel agency to book a flight. Travelers basically buy the cheapest deal they can find on one of the travel sites, irrespective of the carrier. And the simple fact is cheaper fuel is not going to change that outcome.
American Airlines Group Inc: Why You Should Avoid AAL StockFor an airline stock to be an attractive investment, management has to do a couple of things. They have to cap expenses quickly, invest in growth carefully and, always, generate enough cushion for the bad times.
Unfortunately, none of this is true for American Airlines Group Inc (AAL) and that’s why American Airlines stock is one to avoid.
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American Airlines: Too Slow, Too Heavy
Fuel costs have always been a big deal for airlines. Certainly, that was the case when fuel prices surged. But, even now, it’s still a big deal, though prices have fallen to a record low.
With fuel costs being such a wild card, an airline stock needs to maximize its profits when fuel prices are low. In that way, they’re able to compensate investors in the bad times. Unfortunately, this is where American Airlines stock fails.
When we compare American Airlines to JetBlue Airways Corp (JBLU), it’s clear how much less profitable American Airlines stock really is.
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In this case, we’ve used earnings margin (before tax) as an indicator. Earnings margin shows the percentage a company earns from every dollar of revenue. It’s relevant here because it demonstrates efficiency; in other words, how many cents on the dollar the stock is earning before tax.
During the bad times, from 2007 to 2013, American Airlines earnings margin was negative, i.e. they were losing money. Over the same period, however, JetBlue was rather profitable.
But even more recently (2014 onwards), while fuel prices are comparatively low, American Airlines still lags JetBlue with a lower earnings margin.
But wait! There’s more! American Airlines is burdened with debt. The company’s poor earnings record meant that the money for operations had to come from somewhere. That somewhere is debt — and quite a lot of it.
American Airlines’ debt is more than three times its equity. That is compared to about 0.5 equity for JetBlue stock. So not only do you have to worry about American Airlines’ profitability, but its debt burden as well.
American Airlines Click to Enlarge
Source: Morningstar
AAL Stock Is No Bargain
Of course, the counter argument for buying American Airlines stock is that it’s cheap. AAL stock is trading at a price-to-earnings multiple of 6. That’s pretty low compared to JetBlue’s P/E of 9.
Are investors being overly cautious? Not this time. Over the past 10 years, American Airlines was profitable only in four of them. So why would you pay more than six times earnings, when the company has barely been able to profit in four years?
You shouldn’t.
American airlines stock is just not worth the risk. No surprise there.
But, in the same breath, our analysis not only reveals the weakness in AAL stock, but highlights the strength in JBLU stock. JetBlue glows when it’s dark and shines when it’s bright.
In the rough playfield of airlines stocks, JetBlue is at the top of its game.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
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