This airline has seen its stock plummet to a record low. Is it poised for a rebound?
about investing. My hope is that through my sharing of insights, I’ll be able to help you boost your investment portfolio and improve your financial well-being in the long run. Today, let’s talk about this particular airline’s stock. Keep reading below to know whether this company’s stock is due for a rebound.
|
||
|
This airline has seen its stock plummet to a record low. Is it poised for a rebound? In May 2024, American Airlines (AAL) dismissed its chief commercial officer, Vasu Raja, after a thorough review of the airline’s new sales approach. During Raja’s tenure, AAL changed its sales approach and pushed customers to buy tickets on its own sales portals rather than third party websites. As part of the shift in strategy, the airline pulled nearly 40% of its fares from third party travel websites, most of which were AAL’s cheapest tickets.
Strategically, this move gave the airline more control of its customer pipeline. However, customers, specifically corporate flyers, ended up paying more money for AAL flights. Customers weren’t happy with the change, leading them to buy tickets from other airlines. To make things worse, the decline in sales led AAL’s stock to plummet… and while this might look like an opportunity to buy into the airline, the time may NOT be right yet. A Bleak Outlook Even though summer travel is gearing up, AAL forecasts a revenue slide of 5% to 6% year over year, a significantly bigger dip than the airline’s expectations of 2%. To make matters worse, the airline is dealing with employee disputes, as its flight attendant union is preparing to strike after failed labor negotiations. Even though 2023 was AAL’s best year since the pandemic, its Uniform return on assets (ROA) only reached 5%, less than half of the 12% corporate average. As a result of all these, shareholders are getting scared as seen through the Embedded Expectations Analysis (EEA) of Altimetry Financial Research. For those of you who may not know, the EEA is used to calculate what the market expects from a company’s future cash flows. This calculation is based on a firm’s current stock price. After doing this, my friend and colleague Joel Litman and his team at Altimetry compare the results with their own cash flow projections. Simply said, the EEA is an indicator of how well a company has to perform in the future to be worth what the market is paying for it at the present. As mentioned before, AAL saw post-pandemic recovery. However, in 2024, investors expect its Uniform ROA to fall below the 5% breakeven level.
Now that Raja is no longer with the company, AAL is starting to pull away from its pricing strategy. Unfortunately, the market isn’t interested. Shares are down about 17% year to date, almost back to a one-year low. The bottom line? The market doesn’t think AAL has enough going for it to rebound. This statement is particularly true when one looks at the Uniform price-to-book (P/B) ratio of the airline. The P/B ratio compares a company’s total value with the value of the assets on its balance sheet, a.k.a., book. The higher the P/B ratio, the more investors are willing to pay for a company’s assets. A company typically trades below a Uniform P/B ratio of 1 when the market is concerned about a bankruptcy risk. … and while AAL is sitting above a 1, the recent sell-off of its stocks has taken its toll. The company’s P/B ratio is at the lower end of valuations in the past decade.
Based on the data chart above, AAL isn’t in the “bankruptcy cheap” territory. The airline’s stock is unlikely to fall any lower. However, there’s no guarantee that it will rebound. Until AAL’s management fixes its current problems, its stock could be doomed to reach near-book valuations.
Hope you’ve found this week’s insights interesting and helpful. Stay tuned for next Wednesday’s The Independent Investor! Did you know that private equity (PE) firms were once dubbed as “corporate raiders?” Learn more about the future of private equity (PE) in next week’s article! |
