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American Airlines’ Earnings Power Will Propel AAL Shares Higher

Two weeks ago I wrote an article on American Airlines (NASDAQ:AAL) where I changed my mind and recommended AAL stock. The stock rose from $11.22 on June 2 to $16.74 on Friday, June 12. That is a gain of over 49% in less than two weeks.

AAL Stock Will Be Back After Yesterday's Beating

Source: GagliardiPhotography / Shutterstock.com

I felt at the time that AAL stock was likely to rebound and was undervalued. AAL stock will continue to rise since it will be worth much more in less than two years. I will try to put a target value on the stock in this article.

It also doesn’t hurt that on June 12, the company came out with an 8-K SEC filing showing it has been making significant progress. Some of the information has gone further than other airlines have revealed about their operations.

American Shows it Has Turned the Corner

For example, American Airlines presented a table showing that its traffic numbers had increased to 129,000 per day by mid-June. This is up from 31,000 per day in April. No other airline is providing this information.

Moreover, American said its load factor is now up to 62% by June 8. The company is also planning to fly 55% of its total U.S. schedule in July compared to last year.

Another good sign of improving demand is that as of mid-May its travel bookings had turned net positive after taking into account cancellations. In addition, the company’s cash burn rate has fallen to $40 million per day in June. The company expects it to reach break even by the end of 2020.

It looks like it can afford this. For example, assuming $20 million per day over the next six months would cost $3.6 billion to $4 billion overall. Even if the average rate was $30 million per day over six months, it would cost $5.5 billion. But American Airlines says it has three ways to cover that.

First, its cash liquidity will be $6.25 billion by June 30. Second, it expects to receive a government CARES Act loan of $4.75 billion, for a total of $11 billion by the end of Q2. Third, American Airlines showed in the statement that it has over $11.1 billion in unencumbered assets that become collateral for additional loans.

In other words, the company does not seem to be in danger of going bankrupt.

What Is AAL Stock Worth?

Analysts polled by Seeking Alpha expected American Airlines to generate $33.4 billion in revenue by the end of 2021. This is down a good bit from the company’s $42.8 billion revenue in 2019.

Moreover, those analysts don’t expect positive earnings even in 2021. The problem with these projections is that once a novel coronavirus vaccine becomes widely available, the pickup in demand for airline travel could accelerate. In fact, that may occur even when the possibility of a definite vaccine is apparent.

So, even though it’s possible that the company might not get profitable until the end of 2022, I suspect that things will change much quicker than that.

I suspect that AAL will be able to get to at least 50% to 70% of its prior 2019 earnings on a run-rate basis by the end of 2021. The company made $1.686 billion in 2019. So its earnings power is probably between $843 million and $1.18 billion on a run-rate basis by 2021 year-end.

Since American Airlines has 422.9 million shares outstanding its earnings power is $2 and $2.79 per share. So using a below-market multiple of 12 times earnings, the target price is between $24 and $33.48 per share.

That means the potential upside for AAL stock over the next year is 43% to 100%.

What to Do With AAL Stock

The most important thing to remember is that this stock is going to have a high variance. Look for a wild ride. The valuation is highly dependent on the probabilities of a Covid-19 vaccine accelerating the demand for travel.

So the upside is clear. I have built-in a margin of safety in my estimate. But keep in mind that the company will have higher interest costs, higher maintenance expenses, and more volatile demand and capacity factors to deal with.

Nevertheless, at least with the latest information from the company, we can begin to estimate its earnings power going forward. I suspect AAL stock is therefore worth at least 50% more than today’s price over the next year.

Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers receive a two-week free trial. As of this writing, he holds a position in American Airlines (AAL).

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/aal-stock-worth-50-more-two-years/.

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