Tuesday, UBS assumed coverage on American Airlines (NASDAQ:AAL) with a Neutral rating and set a price target of $16.00. The firm highlighted American Airlines as a major network carrier, benefiting from its international reach and a strong loyalty program. However, the airline's Revenue per Available Seat Mile (RASM) has not kept pace with its peers such as Delta Air Lines (NYSE:DAL) and United Airlines (UAL), trailing by 270 basis points over the past five quarters.
According to UBS, American Airlines is expected to show only a low single-digit growth in capacity, measured in Available Seat Miles (ASMs). This slow growth is likely to increase costs per seat mile, with an estimated 5% rise in Cost per Available Seat Mile (CASM) excluding fuel by 2025. This, combined with subdued revenue growth, suggests that there will be limited opportunities for margin expansion.
UBS projects an improvement in American Airlines' pretax margin, from 2.6% in 2024 to 3.3% by 2026. The forecast translates to earnings per share (EPS) of $2.29. Using a price-to-earnings (P/E) ratio of 7 times, the firm indicates that the stock currently reflects an EPS of approximately $2.03 for 2026.
The analysis by UBS concludes that modest margin improvements for American Airlines will likely result in only slight gains for the stock. The Neutral rating reflects the firm's expectation of limited upside potential for American Airlines shares.
In other recent news, American Airlines reported a strong third quarter, with a pretax profit of $271 million and earnings per share of $0.30, surpassing estimates. The total revenue reached $13.6 billion, indicating a 1.2% year-over-year increase. The airline has also announced plans to reduce total debt by at least $13 billion by 2024's end and increase premium seating by 20% by 2026.
On the regulatory front, American Airlines faced a setback as it failed to overturn an antitrust ruling blocking its partnership with JetBlue Airways (NASDAQ:JBLU). Despite this, the company extended its Tax Benefit Preservation Plan to 2027, aiming to safeguard its tax assets and lower federal income tax liabilities.
Several analysts have updated their outlook on the company. Goldman Sachs (NYSE:GS) resumed coverage on American Airlines with a Neutral rating and a price target of $15.00, while Barclays (LON:BARC) upgraded the stock from Underweight to Equal-weight, raising the price target to $16.00. Jefferies increased its price target to $12.00, maintaining a "Hold" rating, and Citi, TD Cowen, and BofA Securities also revised their price targets upwards.
These recent developments highlight American Airlines' efforts to recover lost revenue share, manage labor agreements, and reduce debt while navigating the challenges of the airline industry.
InvestingPro Insights
Recent data from InvestingPro provides additional context to UBS's analysis of American Airlines (NASDAQ:AAL). The company's market capitalization stands at $9.8 billion, with a P/E ratio of 35.7, which aligns with UBS's observation of limited upside potential. However, it's worth noting that the adjusted P/E ratio for the last twelve months as of Q3 2024 is significantly lower at 10.59, suggesting that the stock may be more reasonably valued than it appears at first glance.
InvestingPro Tips highlight that American Airlines operates with a significant debt burden, which could impact its financial flexibility and ability to invest in growth initiatives. This factor may contribute to the modest capacity growth and potential cost increases mentioned in the UBS report. On a positive note, InvestingPro also indicates that 8 analysts have revised their earnings upwards for the upcoming period, which could signal some optimism about the company's near-term performance.
The company's revenue for the last twelve months as of Q3 2024 reached $53.61 billion, with a slight growth of 1.32%. This modest growth rate aligns with UBS's projection of subdued revenue growth and limited margin expansion opportunities.
For investors considering American Airlines, InvestingPro offers 11 additional tips that provide a more comprehensive view of the company's financial health and market position. These insights can be valuable for making informed investment decisions in the airline sector.
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