For Long-Term Investors, American Airlines Is Awful

You’d think that a large cap stock with a trailing P/E ratio of just 3.5 is ridiculously cheap. However, American Airlines (AAL) has been “cheap” for quite some time now and I expect it to remain cheap for the foreseeable future.

American Airlines has dipped almost 10% since I recommended avoiding the stock in an article on Seeking Alpha. Back then America Airlines’ P/E stood at just a little over 4 and most of the readers were convinced that the stock couldn’t go any lower. However, the stock has fallen 10% since then and although I don’t expect it to crash any further, I would strongly advise long-term investors to avoid it.

American Airlines is an ideal value trap and I believe investors shouldn’t use the fundamentals to assess the stock.
Due to American Airlines “no hedging” policy, the company has benefitted the most from the fall in crude oil prices. However, despite the massive profits, American Airlines has been range bound for a long time and is off about 25% from its all-time highs.

The primary reason why I believe American Airlines will not move higher is because of the company’s stance on its debt and ULCCs. Airline investors are paranoid about price wars as a similar crude oil plunge in the 1990s led to a price war, which in turn led to the bankruptcy of many carriers. Over the last few months, American Airlines has announced several times that it will use the oil saving to fight competition from ULCCs, buyback more shares, and add more planes to its fleet.

Understandably, investors were not pleased by the announcement as they wanted the carrier to reduce its debt while keeping the ticket prices higher. Now that the worst of crude oil crash is behind us, it seems like American Airlines has lost the chance to considerably reduce its debt. With oil prices moving higher, American Airlines profits will slowly erode. Hence, the low P/E ratio doesn’t matter right now as the profits from cheaper oil are only short term as oil won’t stay this low forever.

There are many other well-operated airlines that can continue churning profits despite the rise in crude prices, which is why I would recommend investors to dump American Airlines in favor of JetBlue or Spirit Airlines. I also liked Virgin America (VA) and had recommended buying it when I told investors to sell American Airlines, however the carrier was recently acquired by Alaska Airlines (ALK) for a massive premium of 47%.
Published on Apr 13, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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