Today we're going to take a closer look at mid-cap Consumer Discretionary company American Airlines, whose shares are currently trading at $14.78. We've been asking ourselves whether the company is under or over valued at today's prices... let's perform a brief value analysis to find out!
American Airlines Is Overpriced:
American Airlines Group Inc., through its subsidiaries, operates as a network air carrier. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.33. In contrast, American Airlines has a trailing 12 month P/E ratio of 3.8 based on its earnings per share of $3.85.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
American Airlines's PEG ratio is 0.04, which indicates that the market is undervaluing the company's projected growth (a PEG ratio of 1 indicates a fairly valued company). Your analysis of the stock shouldn't end here. Rather, a good PEG ratio should alert you that it may be worthwhile to take a closer look at the stock.
The Business Has Negative Margins on Average:
| 2018-02-21 | 2019-02-25 | 2020-02-19 | 2021-02-17 | 2022-02-22 | 2023-02-22 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $42,622 | $44,541 | $45,768 | $17,337 | $29,882 | $48,971 |
| Gross Margins | 31.0% | 54.0% | 28.0% | -30.0% | 7.0% | 22.0% |
| Operating Margins | 10% | 6% | 7% | -60% | -4% | 3% |
| Net Margins | 3.0% | 3.0% | 4.0% | -51.0% | -7.0% | 0.0% |
| Net Income (MM) | $1,282 | $1,412 | $1,686 | -$8,885 | -$1,993 | $127 |
| Net Interest Expense (MM) | -$959 | -$938 | -$968 | -$1,186 | -$1,782 | -$1,746 |
| Depreciation & Amort. (MM) | -$2,017 | -$2,159 | -$2,318 | -$2,370 | -$2,335 | -$2,298 |
| Earnings Per Share | $2.61 | $3.03 | $3.79 | -$18.36 | -$3.07 | $0.19 |
| EPS Growth | n/a | 16.09% | 25.08% | -584.43% | 83.28% | 106.19% |
| Diluted Shares (MM) | 492 | 466 | 444 | 484 | 649 | 655 |
| Free Cash Flow (MM) | $9,768 | $6,071 | $7,877 | -$4,936 | $719 | $4,658 |
| Capital Expenditures (MM) | -$5,024 | -$2,538 | -$4,062 | -$1,607 | -$15 | -$2,485 |
| Net Current Assets (MM) | -$44,419 | -$52,112 | -$51,907 | -$57,780 | -$56,471 | -$55,246 |
| Long Term Debt (MM) | $22,511 | $21,179 | $21,454 | $29,796 | $35,571 | $32,389 |
| Net Debt / EBITDA | 3.2 | 4.09 | 3.81 | -3.2 | 20.09 | 6.84 |
American Airlines has slimmer gross margins than its peers, consistently negative margins with a negative growth trend, and a highly leveraged balance sheet. On the other hand, the company has positive EPS growth working in its favor. Furthermore, American Airlines has weak revenue growth and a flat capital expenditure trend and irregular cash flows.
