The soaring U.S. dollar is testing the ingenuity of blue-chip management teams, as it’s proving a challenge even for companies that, on the surface, would seem to benefit.
Case in point is American Airlines Group Inc. (NASDAQ:AAL), whose shares have gained on the back of lower fuel costs, which have been driven down by a higher value for the dollar.
And yet, not all is golden for AAL.
Against the “passenger revenue per available seat mile” metric, the airliner expects a decline of 1% to 3% in the first quarter of 2015. The culprit? The high U.S. dollar and weaker foreign currencies, which are weighing down on American’s international flights.
Coupling this with other difficulties — namely, competition from low-cost leaders such as Southwest Airlines Co. (NYSE:LUV) — it’s easy to see why the upcoming earnings report — to be released on April 24 — is so critical for American Airlines.
Currently, the consensus in Wall Street is levered towards the bullish side, with 78% of covering analysts ranking AAL stock as either a “strong buy” or “buy.” But before breaking out the champagne, consider that three months ago, only one analyst held a neutral view. Today, there are four. One of those fence-sitters is Zacks Equity Research, whose proprietary strategy indicates that American Airlines might not beat Zacks’ consensus estimate.
The growing hesitation toward the carrier and the implication for AAL stock is not necessarily justified by the stats.
AAL Earnings Analysis
Over the past 16 earnings reports, American Airlines has beat Wall Street consensus 81% of the time, and the company is currently riding a 12-hit winning streak. Furthermore, whenever the average week-over-week performance of AAL stock is positive heading into the week of its report release, American Airlines comes through with a consensus-beater by a margin of 92%.
As of Thursday, AAL’s average performance was a little under 1% better, and AAL was taking off Thursday — all suggesting another earnings beat, statistically speaking.
On the other hand, investment research firms are likely keying in on recent earnings velocity, which is decidedly negative. For example, in the past three quarterly reports, the positive earnings surprise against the consensus averaged only 1.35%. Contrast this figure with the average surprise of the three quarters prior — between July of 2013 and April of 2014 — which came in at a lofty 7.53%.
If American Airlines does manage to add to its earnings streak, it may not do so with much fanfare.
Adding to the complexity is the performance of AAL stock a month after earnings are released.
Of the total number of estimate-beaters since April 2011, shares have moved up 69% of the time, and returned an average profit of 9.19%. So far, so good. However, over the same time frame, whenever earnings have missed their target, AAL stock has always tanked, returning an average loss of nearly 16%! (To be fair, those misses occurred between July 2011 and March 2012, but it does highlight the importance of American Airlines’ perceived financial performance toward investor sentiment.)
Bottom Line
Considering AAL stock’s overall performance during earnings season, there is a higher probability that its share price will move north from here. However, its market trend has been choppy this year, which makes American Airlines more of a short-term trading opportunity rather than a long-term investment.
My suggestion? Regardless of which way you’re leaning on AAL, trade it via options. And if you’re not inclined to quick trades, stay away from AAL stock for now.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
