When I last wrote about AAL stock I argued that it remained one to avoid. My opinion has not changed: there is currently no valid case for investing in American Airlines (NASDAQ:AAL) long-term.
Technical analysts may well have valid cases for short-term options plays in AAL shares. That is all good and well. However, this article and analysis is intended for those value investors concerned with fundamentals and a longer horizon.
This article will synthesize some of American Airlines most recent earnings information and what that means for the stock. None of the news is particularly promising.
So, the longer the pandemic wears on, the louder speculation regarding an American Airlines bankruptcy will become.
American’s Q2 Revenues
Investors keen to understand American Airlines should first look at the top line revenues. As with all businesses, revenues are the primary driver of success.
No one expected AAL stock to be bolstered by strong revenue in Q2. Investor expectations were low heading into Q2. When the company posted total Q2 revenues of $1.62 billion, markets weren’t shocked.
Still, investors comparing this to same period last year numbers should be worried. American posted nearly $12 billion in Q2 revenues in 2019. That figure represents an 86.45% decrease in revenues year-over-year. Not good.
The Change is Startling
American suffered a loss of $2.05 billion in the second quarter, compared to income of $644 million in the same quarter a year ago. The point here is this: reasonable investors can’t rationally expect this stock to appreciate given that loss.
Further, the $2 billion loss is not trivial. American would need to post three quarters like Q2 2019 in order to erase the loss it incurred this quarter. And even in that case, it would be short by more than $100 million.
Investors should not expect that when air traffic levels normalize that AAL is going to return to pre-pandemic levels. Those who do are kidding themselves.
Long-Term Debt Underpins Operations
American Airlines is incurring debt to continue operations. AAL’s long-term debt has risen by more than 33% in the previous two quarters. The company ended 2019 with more than $21 billion in long-term debt which ballooned above $28 billion by June 30.
The takeaway here is again the same: the effects will be felt over a long period of time and American can’t bounce back quickly from such a situation. Investors should not believe that air traffic alone will cause AAL shares to rebound quickly.
Yet, Credit is Due
American Airlines was not a lean, efficient operator entering the pandemic. Yet, it has handled some aspects of this crisis admirably. When the pandemic grounded flights American quickly suffered a $100 million per day cash burn rate. The company has managed to reduce that rate to $30 million in June.
Regardless of criticism of the company’s operations, this is an impressive figure. Management’s ability to do so in a company of this magnitude is laudable.
Nonetheless, from an investor’s perspective that $30 million in daily cash burn represents an ongoing concern. This cash burn creates long term problems that must be addressed at some point.
Investors should not interpret this as a catalyst for a purchase, but rather to give credit where credit is due.
Issued Lots of Common Stock
During the second quarter, American also issued 85.2 million shares of stock netting $1.1 billion. The company now has 508 million shares in existence. Eighty-five million shares of stock is not a trivial amount.
Management doesn’t break down the $1.1 billion line by line, but we can assume that a good portion of that is going towards shoring up liquidity. Much of it may simply dissipate through daily cash burn. And that means there are 85 million more shares that have a claim to AAL’s profits.
In short, this could signal equity dilution for shareholders.
Final Thoughts on AAL Stock
In short, don’t buy it. Investors who purchased shares in the trough will likely wait a few quarters to see any real appreciation. That is, if the company doesn’t end up bankrupt.
While there are no such imminent signals, persistent rumors exist for a reason. Stay away.
As of this writing Alex Sirois does not own shares in any of the aforementioned stocks.
