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The stock price of American Airlines (NASDAQ: AAL) saw a 13% fall on Wednesday, May 29 after it cut its second quarter outlook and the company’s management admitted to losing business travel to rival airlines. In contrast, United Airlines stock (NASDAQ: UAL) was up 2% the same day. After the pandemic, American Airlines focused on its own website to garner sales and cut its sales staff, but this didn’t work out so well for the airline, as it lost corporate business to some of its rivals.

In this note, we focus on American Airlines’ margin profile along with its stock performance, over the last three years. American Airlines has seen its net income expand by $0.7 billion or 547% y-o-y to $0.82 billion in 2023. This can primarily be attributed to an expansion of its operating margin and lower non-operating expenses. Our What Drove Net Income Change For American Airlines dashboard has more details.

Firstly, let us look at American Airlines’ stock performance. AAL stock has seen a decline of 20% from levels of $15 in early January 2021 to around $12 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. Notably, AAL stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 14% in 2021, -29% in 2022, and 8% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that AAL underperformed the S&P in 2021, 2022, and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AAL face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, we think American Airlines looks like it has ample room for growth. We estimate American Airlines’ Valuation to be $16 per share, reflecting over 30% upside over its current market price of around $12. Our forecast is based on 0.2x sales for American Airlines, aligning with the stock’s average over the last three years. However, there are near-term concerns for the company, as discussed below.

American Airlines Has Seen Its Gross And Operating Margins Expand In Recent Years

After facing tough times during the pandemic, American Airlines gross profit rose from $27 million in 2021 to $11.8 billion in 2023. Its gross profit margin expanded from 0.1% to 22.4% over this period. Similarly, American Airlines also saw its operating margin expand from -16.9% in 2021 to 7.6% in 2023. Although the company saw an increase in its SG&A expenses, which rose 64% between 2021 and 2023, this growth was lower than the 77% rise in total revenues. The fuel prices also cooled y-o-y for the company in 2023.

Net Income Margin Is On The Rise

Along with the expansion of gross and operating income, the company saw its net income rise from $(2.0) billion in 2021 to $822 million in 2023. This can primarily be attributed to the company’s increased sales. On an adjusted basis, net income margin has expanded from -18.1% in 2021 to 3.5% in 2023. However, the company has a high debt level of around $40 billion, and it incurred a significant $2 billion in charges toward interest payments in the last twelve months. Still, the company’s earnings surged from $(8.38) in 2021 to $2.58 in 2023 on a per share and adjusted basis.

American Airlines’ revenue growth lately is being led by capacity expansion as well as better yields. Looking forward, American Airlines expects its 2024 bottom line to be in the range of $2.25 and $3.25 on an adjusted basis. The company has some positives to look forward to, including its plans to expand capacity and reduce its debt. The overall travel demand also remains robust. However, there are near-term headwinds for American Airlines with loss of customers to rival airlines, elevated fuel prices, and lower yields. Its high level of debt also remains a concern. With the stock price falling 15% this year, American Airlines market capitalization has declined to $7.6 billion, implying a very high debt to equity ratio of over 500%.

While AAL stock is facing some headwinds, it is helpful to see how American Airlines’ peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 5/30/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.