Will American Airlines Recover to its Pre-Inflation-Shock Level?

American Airlines stock (NASDAQ: AAL) is currently trading at $15 per share, which is more than 40% below what it was in June 2021. However, the stock has gained 15% since its September 2022 low, compared to the S&P 500, which gained about 6% during the same period. The reduction in inflation rate due to the Federal Reserve’s aggressive rate hike plan and the increase in American Airlines’ revenues have contributed to the stock’s recovery. However, returning to its pre-inflation shock level means the AAL stock will have to gain more than 65% from the current price of $15 per share.

According to our analysis, we estimate American Airlines’ valuation to be around $16 per share, implying over 15% gains. The company has higher debt levels, and its operating margin of 7.3% in 2022 remains below its pre-pandemic levels. With elevated fuel costs, the company may see slower earnings growth in the near term. Adjusted earnings will likely remain below their pre-pandemic figure of $3.79 (2019) in 2023 as well as 2024.

During market turbulence in 2022, American Airlines’ stock performed better than it did during the 2007/2008 crisis, in which it lost almost 90% of its pre-crisis value. AAL’s revenues fell sharply from $45.8 billion in 2019 to just $17.3 billion in 2020 due to the Covid-19 outbreak but improved gradually over 2021 before reaching $49 billion in 2022, with a recovery in travel demand.

AAL’s total debt increased from $24.3 billion in 2019 to $38.1 billion in 2022, while its total cash increased from around $4.0 billion to $13.4 billion. However, the rise in cash balance is because of additional debt raised, as heavy negative operating cash flows in 2020 wiped out positive operating cash flows in 2019, 2021, and 2022.

We believe American Airlines’ stock has potential for solid gains once investor concerns about a potential recession are allayed. However, the pressure on the company’s balance sheet remains a significant risk factor to realizing these gains.

While American Airlines’ stock may have some room for growth, our analysis finds Delta Airlines to be a better investment option. For further comparisons, check out Peer Comparisons at Trefis. If you’re looking for a high-performance portfolio with reduced exposure to market decline, consider Trefis’ Reinforced Value Portfolio.

Disclaimer: The author’s views and opinions expressed in this article do not necessarily reflect those of Nasdaq, Inc.