American Airlines Group (NASDAQ:AAL) is in recovery mode as traffic is picking up and its financials are improving. Based on my assessment of its potential cash flow over the next year, I think AAL stock is still undervalued. My forecast is that the stock could reach $33, or about one-third higher than the present price.
As a result, analysts are not projecting significantly higher revenue for both 2021 (compared to several months ago) as well as for 2022. Seeking Alpha indicates that 2021 sales will hit $28.05 billion. This is up 3.1% from $27.21 billion, at the end of last year, as seen in my last article on AAL stock. Moreover, for 2022, they see sales rising 37% to $38.47 billion.
We can use these numbers to forecast what AAL stock is worth.
What American Airlines Is Worth
In my last article on Dec. 2, 2020, I estimated the cash flow from operations (CFFO) for AAL stock and then applied a multiple to derive its value. With this method, I forecast that American Airlines would be worth $22.92 per share when it was at $14.86. Today, June 1, six months later, AAL stock is at $24.74. So this model works, and we can use it to project out the next six to 12 months.
At the time CFFO was negative at American Airlines. However, recently in Q1 the company produced its first quarter with positive CFFO. Using a 5% CFFO margin, we can estimate that the run-rate CFFO for 2021 will be $1.4025 billion. This is seen by multiplying 5% by the 2021 revenue estimate of $28.05 billion.
Now the actual 2021 run-rate CFFO may not be that high, as the CFFO margin will increase each quarter. But the run rate margin (i.e., the estimate on a going-forward basis) can be conservatively estimated as 5%.
Now we can determine the value for American Airlines. For example, using an 8% cash flow yield, we can estimate its value at $17.53 billion. This is seen by dividing $1.4025 billion CFFO by 8%. Since the existing market capitalization for AAL stock is $15.55 billion, the stock is worth 12.7% more. This means that its value for 2021 is $27.88 (i.e., 12.7% over $24.74 today).
But what about 2022? Using the analyst estimates of $38.47 billion in revenue by then, and a 5% CFFO margin, cash flow will reach $1.9235 billion. Using an 8% cash flow yield, the market value is worth $24 billion (i.e., $1.9235 billion divided by 8%). This is 54.6% higher than today’s $15.55 billion market value.
What to Do With AAL Stock
As a result, sometime in 2022 AAL stock will be worth 54.6% higher than today or $38.25 per share. Or more specifically, the stock will reflect this price based on a forward estimate of its 2022 year-end cash flow from operations. Whether the company will actually reach these CFFO levels by the end of 2022 could be another issue.
Therefore, the best way to estimate the value for AAL stock today is to take an average of its existing value of $27.88 per share and its 2022 value of $38.25. That equals $33 per share, which is also 33% above today’s price of $24.74.
Analysts have been consistently wrong on the stock. When I last wrote about AAL stock the average estimate polled by TipRanks.com was $10.20. That was a 12-month forward price target. Obviously, they were way off as the stock is now at $24.74 six months later.
The same holds true today. The average estimate at TipRanks.com at $20.50, which is 17% below today’s price. So maybe don’t depend on analyst estimates. They have been consistently wrong.
My simplistic model is probably as good as any to use to predict the stock price. If I am right, investors in AAL stock stand to make a good return of over 33% by buying American Airlines.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.