American Airlines (NASDAQ:AAL) announced on March 29 that its recent seven-day moving average of its net bookings was an amazing 90% of the level in 2019. This is fantastic news for the company and implies that people are returning to flying in droves. Moreover, it bodes extremely well for AAL stock, and I now expect it will do extremely well by the end of the summer.
In fact, AAL stock is already up over 50% year-to-date, and, unbelievably, it is up over 95% in the past year. Who would have thought this a year ago? Only contrarian investors would have.
This makes all the airline stocks naysayers look very bad. Chief among them is Warren Buffett, who made an extremely bad move by selling all of Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) airline stocks last May. I wrote about this earlier this month, including his unwillingness to admit that his move was a mistake.
Analysts Are Warming Up
Some are concerned about the travel trends in Europe, which seem to be quite different than in the U.S. A U.K. minister actually recommended that people not book their summer vacations yet. One analyst at Goodbody said that there are growing fears that a second summer of travel will be lost.
Contrast that with the fact that American Airlines recently recalled 2,000 furloughed airline pilots, as have other airlines, according to the Financial Times. In fact, according to the article, some travel execs in Europe are worried if the U.S. opens up and Europe stays relatively closed as it is now, that that would bring a huge inflow of traffic into the U.S. — travel Europe would rather have.
In fact, American Airlines recently said it expects to fly most of its fleet in the coming months. This is due to strong domestic and short-haul international bookings. It cites the fact that Covid-19 infections and hospitalizations have fallen.
More people now have received vaccinations, which is helping lower the infection rate. To aid in this effort, American has begun providing employees the single-shot Johnson and Johnson (NYSE:JNJ) vaccine at O’Hare airport.
This year, analysts expect American Airlines revenue will rise 50.7% to $26.08 billion on average, up from $17.3 billion last year. Next year they see even sales at $36.85 billion, or 41% higher over this year. This puts AAL stock, now with a market capitalization of about $15 billion, at just 40% of 2022 forecast sales.
However, analysts still are not projecting net income profits for American Airlines for some time. For example, earnings per share (EPS) of just 17 cents are forecast for 2022. Significant earnings are not foreseen before 2023 when they project $2.27 in EPS.
What to Do With AAL Stock
This puts AAL stock on a forward price-to-earnings (P/E) of 7.4 times. However, if we discount the earnings from 2023, three years in the future by 15% each year, the adjusted EPS is 65.75% of that figure. This works out to $1.49 per share and makes the adjusted price-to-earnings ratio higher at 12 times earnings.
Even at this higher adjusted P/E multiple, AAL stock does not appear to be too expensive. In fact, the stock could easily rise another 50% from here and it would not seem expensive.
I suspect that will happen over this summer as the airline experiences more bookings, higher revenue and better financial performance. I believe that will also lead analysts to upgrade their view of AAL stock. Granted, many of them will be focused on the airlines that are achieving cash flow profitability much sooner.
However, keep in mind that AAL stock is at the bottom of many analysts’ lists to recommend. For example, TipRanks.com indicates that 13 analysts have set their average target price at $18.89 over the last three months. This represents a potential downside risk of about 21% from the current price.
Therefore, patient investors will take advantage of any weakness in AAL stock over the next several months. That will likely turn out to be a good investment over the long run.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
