When American Airlines (NASDAQ:AAL) fell to multi-year lows last week, investors signaled that they had given up on the company’s prospects. And why wouldn’t they? The company slashed domestic and international flights, adding to its woes. The firm has steep troubles ahead as the U.S. grapples with the novel coronavirus. As more Americans and international travelers adhere to the stay at home policy, AAL stock will signal no clear direction in the near-term.
Knowing when the coronavirus lockdown ends is impossible to predict. The staggering losses that American Airlines faces on a daily basis while in operation will only mount. Looking beyond the current pandemic, markets may consider when its business will recover.
The bounce-back in vacation travel will likely lag. Instead, business travel has a better chance of rebounding first. As a workaround to face-to-face meetings, employees used Zoom (NASDAQ:ZM) or Microsoft (NASDAQ:MSFT) Teams to meet online. But a virtual meeting is no substitute to a physical one.
As businesses return to business as usual some weeks or months from now, demand for air travel will improve. But buying AAL stock on that bet is still a big risk, even though valuations are highly compelling.
Data courtesy of Stock Rover
As shown above, American Airlines grew its revenue steadily in the last few years. Its earnings per share declined, while investors compensated this with a lower price-to-earnings ratio. Looking ahead, the airline will operate at a drastically lower cost basis. It may keep low capacity and reduce staff to match lower demand with less supply.
Survival of the Fittest
American Airlines is aware of how deep the current recession might go. However, despite the big losses ahead, the firm has a positive history in dealing with big struggles. For example, it weathered the 2008 financial crisis. And although the current crisis will send the stock lower, value investors may buy the stock a bit at a time. Since it is not possible to predict where AAL stock will bottom, averaging into the stock in increments could pay off. This approach requires a belief in the airline industry recovering in two to three years’ time.
When restrictions are lifted, the government may issue new travel screening requirements. For example, it may follow China’s screening process of checking passenger temperatures. And with the advent of rapid COVID-19 tests, travelers will have more safety. Additionally, airline staff may have to wear masks to minimize the chances of getting infected.
The Bottom Line on AAL Stock
American Airlines scored an 82 on growth on Stock Rover. This is based on its five-year historical revenue and EBITDA results. Still, if investors used an EBITDA multiples model, they may assume the following:
| Metrics | Range | Conclusion |
| Selected LTM EBITDA Multiple | 6x – 8x | 7x |
| Selected Fwd EBITDA Multiple | 5.1x – 6.3x | 5.7x |
| Fair Value | $9.19 – $25.11 | $16.47 |
Data courtesy of finbox.io
American Airlines has tremendous upside, only if the negative sentiment reverses. That may not happen until investors have a better sense on when airline traffic volumes improve. And until the lockdown ends in the U.S., the company will keep losing money.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, he did not hold a position in any of the aforementioned securities.
