American Airlines (NASDAQ:AAL) reports first-quarter results April 30 before the markets open. They aren’t expected to be anything to write home about, especially for AAL stock.
That said, if I owned American Airlines stock, I’d be more concerned about the second-quarter numbers.
Here’s why.
Business Was Looking Good
The first thing to remember about Q1 2020 is that the first two months of the quarter (January and February) will likely be business as usual and reasonably decent. The final quarter in March is likely to be a lot bumpier.
In Q1 2019, American reported record first-quarter revenues of $10.6 billion with adjusted net earnings of 52 cents a share. Overall revenue in that quarter rose 1.8% year over year due to a strong showing from passenger travel.
The airline’s passenger revenue per available seat mile (PRASM) in last year’s first quarter grew 0.6% to 14.49 cents while total revenue per available seat mile (TRASM) rose 0.5% to 15.87 cents, a company record. Lastly, its load factor (defined as the percentage of seats filled by passengers) was 82.2%, 180 basis points higher than a year earlier. Both its mainline and regional business saw increases.
In January, American reported strong 2019 results with PRASM up 2.2% to 14.74 cents, TRASM was up 1.7% to 16.05 cents, and its load factor was 84.6%, 260 basis points higher.
If you didn’t know about the novel coronavirus and how it was wreaking havoc on the entire airline industry, you would probably be quite pumped for its earnings release, but unless you’ve been living underground, that’s just not the case.
How Bad Will March’s Numbers Be for AAL Stock?
Although January and February traffic was relatively normal, March saw slowing demand. Therefore, American’s unlikely to see year over year increases from Q1 2019 to Q1 2020.
Analysts expect that the airline’s load factor will be 80% in the first quarter. That’s 220 basis points less than in the same quarter a year earlier and 470 basis points less than Q4 2019. Unfortunately, that doesn’t take into account any weakness on the international front. As a result, the load factor could fall into the 70s.
In addition, American is expected to see an 11.1% decline in traffic count from the fourth quarter with PRASM falling by 8.1% compared to the fourth quarter to 13.53 cents and by 6.6% compared to Q1 2019.
From a revenue and earnings standpoint, American is expected to deliver $9.15 billion and a loss of $2.16 a share in the first quarter. That puts earnings and sales lower by 288% and 19%, respectively, over the fourth quarter and 515% and 14%, respectively, over the first quarter last year.
The Second Quarter Could Be What Really Hurts AAL Stock
According to Yahoo Finance, the current earnings estimate for the second quarter ended June 30, is a loss of $7.99, up by more than double from the $3.12 loss estimate from 30 days ago and $2.04 profit 60 days ago. On the revenue front, analysts expect sales of $2.08 billion, 83% lower than in Q2 2019.
The question investors have to ask themselves is: how much of this already baked into American’s stock price?
As I write this, it is down 61% for the year. In a normal situation, one might consider that a bottom is in given that it has mostly traded sideways since the mid-February to mid-March swoon most stocks went through, but these aren’t normal times.
The last time I wrote about American was in mid-March. At the time, I argued that AAL’s stock price was destined for single digits. It went there in early April but it’s since recovered.
“The smart play at this point is to wait for it to fall into single digits. The Trump administration may provide some financial assistance to get the airlines through the darkest days. That could give a lift,” I wrote on March 18.
“An even smarter play if you’re considering AAL stock is to buy Berkshire stock in its place. You get a diversified portfolio of public and private investments, including American Airlines.”
Honestly, I don’t see too much happening to its stock after earnings, good or bad. The real test is going to trading between May and early July when it reports its second-quarter results.
That’s when the rubber will hit the road. Until then, I’m not sure there are any catalysts to drive this stock higher. I guess we’ll soon find out.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
