Take American Airlines (NYSE:AAL). Please. At about $17.60 AAL stock sports a market capitalization of $10.5 billion on 2019 revenue of $45 billion.
Right now, buying an airline stock may look appealing. The world is slowly waking from its COVID-19 slumber. A vaccine is on its way.
The biggest gains should be in the weakest players, so AAL stock is a bargain, right?
Not so fast. Even before the pandemic hit, American’s market cap was just half its revenue. If it meets expectations for $4.2 billion in revenue for the current quarter, its total take for 2020 will be $13.3 billion. Over half of that will have come from the pre-pandemic March quarter.
With Republicans suddenly realizing there’s a debt, now that a Democrat has been elected, help is not coming from Washington. American must make it back on its own.
The Bad News for AAL Stock
Even with government aid, American has taken on a lot of new debt to reach December.
Long term debt stood at $29.6 billion in September, up from $20.9 billion at the start of the year. That’s excluding capitalized lease obligations. American had $8.7 billion in cash in September, and was burning through $44 million per day last quarter. That should be declining, after 19,000 furloughs, but it’s still substantial.
The fourth quarter is looking bad, as the pandemic’s toll swells. American’s latest estimate is for a cash burn of about $30 million/day, meaning cash will be below $6 billion by January.
Even with a vaccine, business won’t pick up immediately. Business travelers have seen savings from doing their work online.
Better News for Travelers
The pandemic’s lingering effects mean conditions for those who do travel will improve.
American’s 321T plane will have just 102 seats. It’s geared to business class passengers going between New York and Los Angeles. For the rest of us American is bringing back the Boeing (NYSE:BA) 737-MAX, which when it’s full is a very profitable plane.
American is eliminating change fees on international flights. It’s showering frequent flyers with gifts. It’s promising more flexibility for travelers in 2021.
The result is that speculators are telling you to buy AAL stock.
No New Normal
Even in the good days of 2019, however, American was a marginal business. Net income was under $1.7 billion, on those $45 billion of sales.
Analysts rate American the lowest among the major airlines, with 5 of 7 saying you should sell it. By contrast, only 3 of 13 United Airlines (NYSE:UAL) analysts are saying sell, while Delta Air Lines (NYSE:DAL) and Southwest Air (NYSE:LUV) are considered moderate buys.
American is admitting to slowing demand. It’s facing a shortage of flight attendants. It’s exiting small markets, blaming the pandemic and lack of government relief.
Speculators are buying American, boosting the price 26% in just three months. If American is the sickest of the airline stocks, that just means it has further to go. When things get back to normal, the speculators will get out and all will be well.
The Bottom Line on AAL Stock
The problem is things won’t come back all at once.
American should continue to lose money through 2021. Estimates have continued to deteriorate, from a loss of $2.30 per share three months ago to $5.39 per share now. The consensus revenue estimate for 2021 is $27.8 billion, 40% below normal.
Investors are buying Delta and Southwest because they have the cash to come back strong. Analysts are not yet convinced about American. You can speculate on American stock, throwing some mad money you don’t mind losing at it. You may wind up with a profit.
But invest elsewhere.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
