Is American Airlines Stock A Buy As Air Travel Recovers?
The airline industry and American Airlines stock look to rebound from the coronavirus crisis as U.S. health officials say vaccinated people can travel. So, is AAL stock a good buy? For the answer, take a look at American’s earnings and stock chart.
On April 2, the Centers for Disease Control and Prevention said fully vaccinated people are able to travel domestically without Covid-19 testing or the need to quarantine as long as they continue to wear masks while traveling and practice social distancing.
The Transportation Security Administration has seen over 1 million travelers come through its checkpoints daily since March 11.
With air travel returning, airlines have recalled pilots and announced new hiring initiatives. United Airlines (UAL) announced in early April that it plans to hire 10,000 pilots by 2030.
American Airlines Fundamental Analysis
Even before the pandemic, American Airlines’ earnings and revenue had been weak for some time. The IBD Stock Checkup tool shows that over the last three years, American Airlines’ earnings per share were flat on an annual basis, with revenue falling at an average of 9%. CAN SLIM investing recommends investors look for bottom-line growth of 25% or more.
Then global travel demand collapsed during the coronavirus crisis. American and other carriers slashed flight schedules to just a fraction of pre-pandemic levels.
Before the sharp decline in travel amid Covid-19, Fort Worth, Texas-based American Air and its regional carrier, American Eagle, operated 700 flights per day to nearly 350 destinations in more than 50 countries, according to the company.
In its fourth-quarter report in January, American Airlines reported a loss of $3.86 a share, with revenue tumbling to $4.03 billion. But both beat Wall Street estimates.
Daily cash burn fell to $30 million in Q4 from $44 million in Q3 and $58 million in Q2. The company expects Q1 daily cash burn of $25 million -$30 million and sees Q1 revenue down 60%-65% vs. a year earlier with system capacity off 45%.
Earlier in January, United reported a deeper Q4 loss than expected and doesn’t see the inflection in travel recovery coming until the second half of 2021. And Delta reported mixed Q4 results and gave weak Q1 guidance, but the airline sees a turnaround on its cash burn by the spring.
Airline Industry Outlook
The International Air Transport Association expects the air travel sector to lose $38.7 billion this year, more than double the prior view for a loss of $15.8 billion. IATA doesn’t see passenger traffic rebounding to 2019 levels until 2024, a year later than previous outlooks.
Lucrative business travel may be depressed long term, as the work-from-home and videoconferencing trends aren’t going away. In turn, airlines are competing harder for leisure travelers and have aggressively expanded to new routes throughout the pandemic with a focus on destinations appealing to outdoor activities.
Meanwhile, United announced in August that it would permanently scrap change fees for domestic flights as it looks to boost bookings amid the coronavirus pandemic. The very next day, American and Delta made similar moves.
Change fees are big business for airlines. The Department of Transportation said U.S. carriers saw $2.8 billion in ticket-change and cancellation fees in 2019.
AAL stock was the target of a Reddit short squeeze in late January and early February as a group on the popular message board site looked to take on hedge funds.
Shares have bounced off a test at the 50-day line and decisively cleared an 18.73 entry point in late February, according to MarketSmith chart analysis. AAL stock is now extended above the buy range, which extends to 19.67, and is in profit taking range.
CAN SLIM fundamentals suggest the 20%-25% profit-taking rule, meaning investors should sell a stock if it goes up more than 20% from its purchase price.
No new pattern has formed, though a break above recent resistance at the 22 level would be a bullish sign.
The relative strength line, which compares a stock’s price action with that of the S&P 500 overall, has shot up after hitting the lowest point since August 2013. The RS line began to spike in November following earnings and Covid-19 vaccine news.
AAL stock has a RS Rating of 88. The best stocks usually have a Relative Strength Rating of 80 or higher before they break out to meaningful gains.
Shares have an Accumulation/Distribution rating of B+, indicating institutional investors are buying up American Airlines stock. That’s despite high-profile investors like Warren Buffett selling off his stakes in airline stocks soon after loading up on them, as air travel collapsed.
Covid-19, 737 Max Hit American Airlines Stock
Even before the pandemic hit, the global grounding of the Boeing (BA) 737 Max weighed on AAL stock. The 737 Max came out of service after a fatal Ethiopian Airlines crash in March 2019, following a similar deadly crash with Indonesia’s Lion Air in October 2018. Officials have blamed the Maneuvering Characteristics Augmentation System for the crashes, which together killed 346 people.
But on Nov. 18., the Federal Aviation Administration approved the 737 Max’s return to service.
On Dec. 29, American began offering daily Boeing 737 Max flights between Miami and New York. Despite the lifted grounding, American Air management plans to defer Boeing 737 Max deliveries. Eight planes previously set for delivery in 2021 and 10 set for 2022 will now come as late as 2024, American said Oct. 22.
Is American Airlines Stock A Buy?
Shares have surged recently and close to pre-pandemic levels and are in profit taking range. The relative strength line for American and the 50-day line are trending upward.
But AAL stock is not in a buy zone now and still faces longer-term headwinds. Even after the pandemic eases, the travel sector isn’t expected to rebound quickly as different markets come back sooner than others, with jurisdictions placing different restrictions on the industry.
Bottom line: American Airlines stock isn’t a buy right now.
Follow Gillian Rich on Twitter @IBD_GRich for aviation news and more.
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