American Airlines Group (NASDAQ:AAL) is likely to stage a dramatic recovery over the next two years as travel patterns return to normal. But that does not mean AAL stock will not have rough periods such as it is having after the close of the 2020 Christmas travel period.
Moreover, AAL stock may take longer than other airlines to recover. It has much more debt and a higher cost structure than these other people.
This is the conclusion of a recent Seeking Alpha article on AAL stock. It goes through the company’s recent turbulent history and why it has higher debt and legacy cost structures than its peers.
Anticipating the Turnaround
Nevertheless, the fact remains that as more people get the various Covid-19 vaccines, the spread of the virus will subside. This will almost by definition increase the willingness of the public to take more leisure and especially business travel.
Moreover, the company does not need to produce dramatic profits before AAL stock begins a major turnaround. The market anticipates the future. It will discount a turnaround of at least six to nine months in advance.
I suspect that in the case of American Airlines, it will anticipate this even longer out.
For example, AAL stock hit a peak of over $20 per share in early July. That was when the U.S. was coming out of the depths of the first legs of the Covid-19 crisis.
But then it became clear there would be a second round of restrictions and Covid-19 lockdowns in the fall and winter. That meant that AAL stock took a second hit.
By March/April it will be clear that the vaccines are working to spread the virus. As a result, American Airlines and other travel stocks will rebound again.
So, what is AAL stock worth and is it worth investing in now?
Figuring Out American Airlines’ Value
Right now, that is pretty hard to do. For example, analysts foresee a loss of $20 per share or higher for 2020 and even -$5.46 for 2021.
In fact, earnings are not even forecast to reach breakeven until 2022, according to surveys by Seeking Alpha of Wall Street analysts. And that is only at 6 cents in earnings per share (EPS).
Moreover, meaningful earnings per share don’t even come in until 2023, at $1.82 per share. And it’s not until 2024 before analysts are comfortable forecasting profits of $4.95.
Therefore, using a 15% discount rate over four years, the present value of 2024 EPS is 57.175% of that future number. This works out to a present value of $2.83 per share (i.e., 0.57175 x $4.95 = $2.83).
As a result, putting a 10x multiple on that present value EPS figure gives AAL stock a value today of $28.30 (10x $2.83). That represents a potential gain of 80% over today’s price of $15.65.
However, let’s be even more conservative. Using a 20% discount rate lowers the present value of four year-out earnings by a 48.225% factor. Therefore, the present value of 2024 EPS using a 20% discount factor is $2.387 per share.
This means that our more conservative value for AAL stock, at 10x the present value of earnings, is $23.87 per share.
The good news is that still represents a potential 52.5% gain in the AAL stock price. The bad news is that it may take some time for the market to accept this kind of rationale. There has to be some sort of catalyst moving the stock up to that valuation.
What To Do With AAL Stock
No one in Wall Street’s sell-side analytical crowd believes in a possible American Airlines turnaround. They see all the debt and huge issues going forward that the company has to overcome.
For example, Tipranks says eight analysts have an average price target of $12.75 for AAL stock. Marketbeat.com says that 20 analysts have a consensus target of just $14.63 per share. Yahoo! Finance reports that 18 analysts have an average target of just $11.36 per share for AAL stock.
All of these prices are well below the existing price. The Street won’t believe in any kind of turnaround for the time being.
I took an American Airlines trip across the U.S during the holiday. Everywhere I went the airports were packed. And the flights were just as packed as before. From my standpoint, the airline is already in turnaround.
It will probably take some time for Wall Street to catch up. Expect the stock to move up well before analysts’ estimates for AAL stock move higher.
On the date of publication, Mark R. Hake has a long position in American Airlines (AAL) stock.
Mark Hake runs the Total Yield Value Guide which you can review here.
View more information: https://investorplace.com/2021/01/aal-stock-recover-dramatically-over-next-2-years/