American Airlines earnings preview: revenue to grow but turbulence expected
As the world's largest airline prepares to report earnings, Wall Street braces for headwinds amidst revenue growth.
Earnings outlook
Wall Street anticipates a year-over-year decline in earnings for American Airlines (AAL) in the quarter ended June 2024, despite expectations of higher revenues. Analysts project quarterly earnings of $1.05 per share, representing a 45.3% decrease from the previous year. However, revenues are forecasted to reach $14.42 billion, marking a 2.6% increase from the same quarter last year.
Recent performance and challenges
AAL has faced significant challenges recently, with its stock price falling 13% on May 29 following a cut in its second-quarter (Q2) outlook. The company acknowledged losing business travel to rival airlines, partly due to its strategy of focusing on direct website sales and reducing its sales staff. This approach appears to have backfired, resulting in a loss of corporate business to competitors.
Financial improvements
Despite these setbacks, AAL has shown some financial improvements. The company's net income expanded by 547% year-over-year (YoY) to $0.82 billion in 2023, primarily attributed to an expansion of its operating margin and lower non-operating expenses. Both gross and operating margins have seen significant growth since 2021, with the net income margin rising from -18.1% in 2021 to 3.5% in 2023.
Stock performance and valuation
AAL stock has consistently underperformed the S&P 500 from 2021 to 2023. However, analysts estimate AAL's valuation to be $16 per share, suggesting a potential upside of over 30% from its current market price of around $12. This valuation is based on a sales multiple of 0.2x, aligning with the stock's average over the last three years.
Outlook and concerns
Looking ahead, AAL expects its 2024 adjusted earnings to be between $2.25 and $3.25 per share. The company has plans for capacity expansion and debt reduction, while overall travel demand remains robust. However, AAL faces several near-term headwinds, including the loss of customers to rival airlines, elevated fuel prices, and lower yields. Additionally, the company's high debt level of around $40 billion remains a significant concern for investors and analysts alike.
AAL stock price – technical analysis
July saw the stock price fall to its lowest level since the Covid-19 pandemic, continuing the negative momentum from the gloomy update on 29 May.
A dip towards $10 was met by buying, but the overall bearish impression remains in place. Short term rallies in February, March and early May all hit fresh selling, indicating generally bearish sentiment.
In the short-term, any rebound targets the mid-April low at $12.72.
AAL price chart
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