It has not been a good couple of days for American Airlines (NASDAQ:AAL) stock. While AAL stock actually ended the last week of April higher by 3.2%, don’t let that “gain” fool you.
First realize that, even though the carrier’s shares ended the week higher, it still closed more than 17% below its five-day high. Second, despite a massive rally in the overall markets, American Airlines stock can hardly get off the mat. Shares are barely holding up above the 52-week low.
For comparison, in the last five days, while AAL stock lost 9.7%, the 34-stock U.S. Global Jets ETF (NYSEArca:JETS) was down about a third of that, off 3.2%. American Airlines is the exchange-traded fund’s number two holding, at 11.45%, just behind Southwest Airlines (NYSE:LUV) at 11.73% of the portfolio.
Now, look at some of these recent news items.
Bevy of Bearishness
First, we have earnings. On April 30, the company reported a top- and bottom-line miss.
A non-GAAP loss of $2.65 per share missed estimates by 29 cents, while a GAAP loss of $5.26 per share missed estimates by more than $3 per share. Revenue of $8.52 billion was down 19.5% year-over-year and missed expectations by almost $500 million.
Some investors may think a 20% drop in revenue isn’t so bad under the circumstances. That is, until they realize it was basically business as usual for two-thirds of the quarter. It shows just what type of drought American Airlines and its airline-industry peers are dealing with.
On May 1, Evercore ISI cut its price target from $10 to a chilling $1. That goes alongside the firm’s underweight rating, with the analyst arguing that American will end the year with net debt “far exceeding” revenue. Evercore further argued that AAL entered the crisis with the weakest balance sheet compared to its peers.
Over the weekend, Warren Buffett spoke on the airlines. “It changed in a very major way,” The Oracle of Omaha said of the airline business. Buffett acknowledges that the firm was not disappointed in the way the businesses were being run.
However, that didn’t stop Berkshire Hathaway (NYSE:BRK.B, NYSE:BRK.A) from exiting its position in the industry. It sold its stakes in Delta Air Lines (NYSE:DAL), Southwest, United Airlines (NASDAQ:UAL) and you guessed it, AAL stock.
He urged investors not to think of Berkshire’s exit as a market prediction. Rather, he reasoned that the upside would be limited due to federal-aid borrowing and said, “I’m not sure if as many people are going to be flying in two or three years.”
A Possible Silver Lining?
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We have a bad top- and bottom-line earnings miss, a new $1 price target and Warren Buffet hitting the exits. What could possibly be the silver lining in this case?
The silver lining here would be AAL stock avoiding new 52-week lows. The caveat to that statement would be for American Airlines to break the lows but quickly reclaim them.
Shares fell 11.4% on Friday and were down another 10% in Monday trading before clawing back and ending the day off 7.71%, to roughly $9.80. This isn’t just a make-or-break situation for AAL stock — it is for most of the industry as it pertains to the technicals.
If American Airlines can avoid making new lows with so much negativity in the air, it will be an impressive feat. It will also show that the bears don’t have what it takes to drive the stock lower.
Bottom Line on AAL Stock
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Does that possibility make me bullish on AAL stock? No.
For starters, the possibility of a silver lining is just that: a possibility. It is not a guarantee. If it comes to fruition I will be more bullish, but the carrier is not out of the woods yet. I covered American Airlines stock last month, lamenting about its poor financials compared to its peers.
Federal aid may keep American from its otherwise one-way ticket to bankruptcy. But that doesn’t mean it’s a business I want to invest in. The latest earnings report was proof enough.
While last quarter and this quarter are likely to take the brunt of the novel coronavirus, it’s hitting at a bad time. Q2 and Q3 are historically American Air’s best two quarters, and they will be hampered by lower airport traffic. Further, the company is aiming to lower its cash burn to $70 million per day for Q2. For an entity with an already-weakened balance sheet, this is bad news.
It leaves us in a wait-and-see approach, starting with how the stock responds on this dip. No new lows would be great news for bulls.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
