As trading opened on June 9, no stock is as much of a battlefield as American Airlines (NYSE:AAL).
AAL stock is up over 100% since May 22. The company has retraced half of its COVID-19 loss.
But the shares remain volatile. They fell 7% in overnight trading after TV analyst Jim Cramer said “sell.” If I were handsome enough to be on TV, I’d be saying the same thing.
But what do we know?
American Airlines has been trading like a tech stock this month. The company sees a strong summer travel season and has boosted its schedule for July. The number of people going through airline check-ins keeps rising. Las Vegas is back, baby!
What the Bear Sees in AAL Stock
Bears see an airline flying into the teeth of the COVID-19 gale, heedless of health warnings.
I called it a “great speculation” in March, when the shares were priced at $11 each. If you took my advice then, you’re sitting on a profit. But you don’t have a profit until you sell and have the cash in your pocket.
American Airlines took almost $6 billion in government aid, enough to keep flying without revenue through September. That included warrants that let the government buy 13.7 million shares, about 3% of those outstanding, at $12.51 each. Look, a Trump profit!
But the airline is burning through $70 million of that cash each day. And while demand is up, it’s nowhere near pre-pandemic levels. Analysts estimate American will report $1.43 billion in revenue for the June quarter. In the December quarter, revenue was $11.8 billion.
Even while the stock was rallying on June 3, S&P was dropping the company’s bond rating to B-. That’s not just a junk rating, that’s a used-DVD player junk rating. The rating is still on watch for another downgrade, to CCC, reflecting debt that is “currently vulnerable to nonpayment.” Bonds issued at 5%, due to mature in early 2022, are now selling at 78 cents on the dollar.
What the Bull Sees
If the bears are wrong, American is still a great speculation
In normal times, American averages $43 billion a year in revenue. The market cap today is still just $8.5 billion.
The company has been aggressively seeking cargo revenue to replace passengers. It is selling tickets aggressively, claiming “flexibility” in press releases. American says it will fly 55% of its domestic schedule in July, up from 20% in May.
Despite the improved outlook and despite the bailout, American is aggressively “right-sizing” its costs. About one-third of its management and administrative staff, 5,000 people, are preparing to hit the bricks. The severance costs will hit the books once but won’t be repeated.
American’s traffic is rebounding faster than that of United Airlines (NYSE:UAL) or Delta Air Lines (NYSE:DAL), CEO Doug Parker said. Over two-thirds of its routes are domestic or short-haul. Parker insists the company won’t go bankrupt. In a cash crunch he suggests it could pre-sell frequent flyer miles, mortgage its planes, or sell more stock.
The Bottom Line
Right now, a bet on American Airlines stock is a bet against the COVID-19 pandemic.
If the worst is over, or if we just ignore the risk, the stock is a bargain, selling for less than a quarter’s revenue. Cost-cutting, flying only the most profitable routes and planes, could mean a positive bottom line by early next year.
I am personally betting that Warren Buffett is right, that a second wave of infection means a second down leg for the market. If you disagree, feel free to buy American Airlines stock here.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.