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Why Investors Should Avoid American Airlines for Now

AAL stock will face more selling pressure as passenger traffic falls and the risk of another shutdown rises

Hovering nicely above 52-week lows, American Airlines (NASDAQ:AAL) is at elevated risks of falling if short-sellers have their way. AAL stock has a short float of about 34.4%. Bears are betting that the airline will not stem losses fast enough to stay in business.

Turbulence Ahead for AAL Stock as Cash Preservation Rules
Source: GagliardiPhotography / Shutterstock.com

With more than 4.3 million positive tests of the novel coronavirus in the U.S., the airline industry’s passenger growth risks stalling. At any time, the Centers for Disease Control may issue a warning on cross-state traveling. This would hurt American Airlines’ passenger traffic.

How dire does American Airlines look in the near-term?

Job Cuts Hurts AAL Stock

American Airlines warned that 25,000 jobs are at risk of getting cut. It urged staff to take a buyout or early retirement. By fall, it may have to cut more than 20,000 staff because the quick rebound in travel demand is delayed because of the resurgence in Covid-19 cases. The company said, “with infection rates increasing, and several states reestablishing quarantine restrictions, demand for air travel is slowing again.”

If American cuts jobs, so might United Airlines (NASDAQ:UAL). Other competitors may follow in response to a severe glut with flight supply and not enough demand.

Driving the weakness ahead is the failure of the U.S. to stop Covid-19 from spreading again. Still, the government is not the only reason for the virus count increasing. People who do not practice physical distancing or wearing a mask at all times, especially inside, may have worsened the problem. The economy, especially travel, leisure and hospitality will suffer the most. American’s stock could re-visit 52-week lows as investors give up on the short-term recovery narrative.

Survival Mode

American’s job-cut plan will save money but hurt employee morale. The nearly 20% workforce cut will disrupt operations, worsen customer service levels, and reduce customer loyalty.

American reports quarterly results on July 23, as will Southwest Airlines (NYSE:LUV). The poor results will add no new insight for investors. Bears will expect weak revenue compared to last year. Expectations are high that American will forecast a weak recovery and will not expect to run at break-even in the near term.

Investors may look at Transportation Security Administration traveler throughput. For example, traveler traffic is cycling between the 650,000 to 750,000 range daily. Daily traffic is approaching the 1 million level but to sustain it, daily virus infection rates in the U.S. need to fall.

American’s traffic forecast may give investors some hope. But knowing when the business gets better is anyone’s guess.

Fair Value on AAL Stock

Most analysts rate American Airlines stock a “sell.” The average price target is $12.88 (per tipranks). Based on its future cash flow, the stock could have a fair value as high as $18.38, according to simplywall.st. Bankruptcy risks are rising so long as travel demand growth slows. Conversely, the company has enough liquidity for now.

At a Bernstein Strategic Decisions event, CEO Doug Parker said the company expects to have around $11 billion in liquidity in the second quarter. That includes $4.75 billion in loans it received from the Treasury Department. Cash burn is around $70 million a day on average in Q2. Parker expected that to fall to $50 million in June 2020.

When asked about thinking about filing for bankruptcy as a tool to manage the debt crisis, the CEO said, “One of the things I’m most proud of is that I’ve never worked for a bankrupt airline, which in the airline business that’s actually a real accomplishment, as you know.”

Your Takeaway on AAL Stock

American Airlines is too risky to invest in as the pandemic rages worldwide and especially in the United States. Investors should let the bears bet against the stock while staying on the sidelines.

If the passenger traffic data points to growing demand, only then should you consider buying this stock.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/why-investors-should-avoid-american-airlines-for-now/.

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