I Still Hate American Airlines, but It Is a Buy Now

As my followers would know, I have been bearish on American Airlines (AAL) for quite some time now. I first recommended selling the stock when it was trading over $43 and the stock has retracted over 15% since then. I also recommended investors to dump American Airlines in favor of other carriers with better potential like Virgin America (VA) and JetBlue (JBLU).

American Airlines has struggled despite delivering great earnings report and the stock looks very cheap right now with a trailing P/E of 3.34.
The primary reason why American Airlines has retracted has been the carrier’s falling passenger revenue per average seat mile, or PRASM. Due to competing against other carrier’s on price, American Airlines PRASM has taken a hit.

PRASM has become an important metric for airline investors. In fact, investors focus more on a company’s PRASM than its earnings. Due to the fact that crude oil will not stay this low forever, investors gauge a carrier’s success by its PRASM and ignore its short-term earnings boost.

For this reason, shares of American Airlines have been range bound and are off about 30% from its all-time high levels. Another reason why American Airlines has been range bound is the carrier’s massive debt. Instead of using the oil savings to pay off its debt, American Airlines has taken on more debt to buy back shares, compete on price against ULCCs, and bought more efficient planes.

Investors have not liked this strategy and with the company’s debt now standing at over $20.5 billion, I expect the stock to continue remaining range bound for the foreseeable future. That being said, I think American Airlines is not at the bottom end of its range band. So, despite the fact that I don’t like the stock, I think now may be the time to buy it as the downside is strictly limited.

At a P/E of 3.34, American Airlines doesn’t have much room to fall and should head up in the near future. Although I still don’t think American Airlines is a good long-term investment, traders can consider buying the stock near the bottom end of its range band. As much as I don’t like the stock, I wouldn’t be surprised to see American Airlines soar towards $40 in the next few weeks, which is why I think it is a short term buy.
Published on Apr 27, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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