With airline stocks surging following last month’s vaccine news, you may think the ship has sailed with American Airlines (NASDAQ:AAL) and AAL stock. Yet this remains a “buy the dip” situation.
Firstly, the partial recovery we’ve seen since November pales in comparison to the total potential recovery. Secondly, even today, investors are still cautious about pricing in a vaccine-fueled 2021 recovery. If said uncertainty shifts to confidence as the coming year unfolds, expect shares to continue trending higher.
Thirdly, while American remains in a relatively precarious financial situation, it’s not as bad as it looks. Investors have more than priced-in this factor. With its $14 billion in liquidity, the carrier has enough to continue riding out the storm.
Simply put, there’s more to push this stock higher, not lower, in the next twelve months. The skies may still look foggy now, but if you wait until it’s “clear skies ahead,” it’ll be too late. Shares will be back near pre-outbreak levels by then.
So, what’s the call? Take advantage of the uncertainty and buy the dip.
Why AAL Stock Has More Room to Recover
Following the recent rally, some are looking for reasons to go bearish yet again. Yet, overall the odds are in favor of things improving over the next twelve months.
While the legacy carrier’s shares are up around 46% since Nov. 4, this partial recovery is just the beginning. Considering it traded for around $30 per share last February, there’s plenty of room for additional share price recovery. That’s not to say it’ll be rapid. Per TSA checkpoint travel numbers, air passenger traffic remains far below pre-pandemic levels. Even with the increased air travel during the holidays.
Traffic numbers could dip back after New Year’s, but as vaccine availability increases, so will air passenger demand. As checkpoint travel numbers climb firmly above 50%, expect a further boost in airline names like AAL stock.
Investors also have yet to fully price-in a vaccine-fueled pandemic recovery. Sure, with shares at around $16 per share, versus around $11 per share a few months back, Wall Street has handicapped improved prospects into American’s share price.
But it’s still unclear when travel, especially business travel, will get back to normal. Based on what industry experts have said, you can’t say with confidence business travel will get back to 100% of where it was in 2019. Yet, with a permanent haircut to business travel already priced-in, this is another factor that won’t sink American shares further.
American and Its Precarious Financials
Beyond near-term travel demand, the other key issue is the precarious financials of AAL stock. Burdened with nearly $40 billion in debt and operating lease liabilities, it’s much more levered than other legacy carriers. Not only that, cash burn continues to be an issue. For the current quarter (ending Dec. 31), it’s set to be in the top range of a prior $25 million-$30 million per day forecast.
However, the financial situation with American is less dire than it looks. For starters, the just-signed second stimulus bill provides $15 billion in aid to help the airlines cover payrolls through March. Also, the airline has said it’ll have $14 billion in liquidity by year’s end. Even if cash burn stays as is, the carrier has enough to ride out the pandemic’s last leg.
To top it all off, there’s a silver lining to the current issues impacting AAL stock. Forced to adapt, the carrier partially rationalized its bloated cost structure in 2020. Many of the cost cuts this year were furloughs. With the stimulus aid, many of those furloughed in September are coming back to work.
The carrier’s cost cutting included thousands of permanent layoffs as well, meaning American has a good shot of returning to profitability. Even if air travel doesn’t get right back to 100% right away.
In short, while it’s not as financially strong as some of its rivals, this alone isn’t a deal-breaker. Investors may continue to underestimate its rebound abilities. But, those who take a risk and dive in today stand to see worthwhile gains from here.
Buy Now Before the Recovery Is Priced-In
If you want to seize the opportunity with American Airlines, you have to take a risk. In other words, you have to buy when it’s darkest before the dawn. Things now aren’t as bleak for air travel as they were back in the spring, but pandemic uncertainty continues to weigh down on the sector.
Although the vaccines will not fuel an immediate airline rebound, things are set to improve in 2021. As air travel continues crawling back to normal, expect further gains in this and other airline stocks.
Bottom line: Buy AAL stock now before the recovery is priced-in.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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