Investors may be less worried now about the impact of COVID-19’s Delta variant on airline stocks, but this latest outbreak isn’t the only issue at hand with American Airlines (AAL) stock. The legacy carrier faces a much more challenging path back to profitability, compared to its peers.
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Moreover, American Airlines is much more indebted than the other “old school” airlines. Once it returns to profitability, chances are that it will have to use the bulk of this cash to satisfy these obligations. The company will have to repay debts instead of using its profits for investments/improvements that will increase its competitiveness.
Yet, these concerns continue to stay on the back burner. Retail investors remain enthused about the stock. Sure, it’s pulled back on worries about the Delta variant. Still, it has out-performed peers like Delta Airlines (DAL) and United Airlines (UAL). Even some in the analyst community have grown increasingly bullish, on the heels of American’s latest earnings release. (See American Airlines stock charts on TipRanks)
So, will its red flags become more top of mind in the coming months? Or will the market continue to focus entirely on the positives, and gloss over the negatives? It’s too early to tell.
AAL Stock and its Many Issues
Putting it simply, this carrier faces a longer road back to profits than its main rivals, Delta and United.
Both carriers are well ahead of American Airlines when it comes to returning to quarterly profitability (net of government support). If it continues to lag behind, it will be harder for investors to justify pricing in the “travel recovery” to the extent they’ve done so far this year.
If this airline gets back to profitability sooner than expected? There’s another issue that could start to weigh on AAL stock, earnings rebound or not. That would be its highly-leveraged balance sheet. This includes around $36.7 billion in long-term debt, plus a total of $13.8 billion in lease, pension, and post-retirement benefits liabilities.
As mentioned above, having to meet these obligations will take cash that could be deployed elsewhere. That is, it could be used areas that would make this airline more competitive. Not only more competitive to rival “old school” airlines like Delta and United, but more competitive with low-cost carriers, like Southwest (LUV), as well.
Retail Sentiment and Sell-Side Ratings May Keep it Steady
AAL stock has been weighed down by Delta variant concerns. Yet the issues mentioned above haven’t done much to sour investor sentiment.
Retail investors have continued to treat it as a one-way bet on a travel recovery. Despite its underlying weaknesses, AAL stock has actually been the top-performing airline stock this year.
As seen from more recent analyst ratings, it’s not just individual investors who are bullish on American. Last month, analyst Daniel McKenzie from Seaport Global Securities upgraded the stock to a Buy.
Citing the prospects of a recovery in business and international travel, as well as the company’s plans to tackle its balance sheet issues, with his $27 per share price target, McKenzie believes the carrier has more runway ahead.
Impressed with its latest earnings and guidance, other analysts have upped their price targets as well. Only time will tell whether the company works through its concerns. Yet as retail investors remain bullish, and analysts become more bullish, shares may face little risk of falling back further.
What Analysts are Saying about AAL Stock
According to TipRanks, AAL stock has a consensus rating of Hold. Out of 11 analyst ratings, 3 rate it a Buy, 6 analysts rate it a Hold, and 2 analysts rate it a Sell.
As for price targets, the average American Airlines price target is $21.75 per share, implying around 5.79% in upside from today’s prices. Analyst price targets range from a low of $15 per share, to a high of $29 per share.
For Now Ride is Smooth, But it Could Get Bumpier
Increased optimism among analysts, along with the continued retail enthusiasm, have kept American Airlines in the lead as the top performing airline stock of 2021.
However, in the coming months, what will happen if it seems that the company’s recovery not is playing as expected, or if its long standing issue (high debt) starts to have a greater impact on investor opinions? Its current smooth ride could get a whole lot bumpier for AAL stock.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
