American Airlines stock (NASDAQ: AAL) is up 15% this month after the company raised its fourth-quarter outlook. American Airlines now expects fourth-quarter earnings to be between $0.55 and $0.75 per share, compared to its previous forecast of $0.25 to $0.50. The company will benefit from its recently announced agreement with Citibank for a co-branded credit card – AAdvantage. This agreement will help the airline generate more cash flows in the coming years. The co-branded card is expected to generate $10 billion in annual revenue and increase the company’s pretax profit by $1.5 billion. Aside from that, will higher inflation continue to impact spending? Do you see further downside risks for EL stock?

Over a slightly longer period of time, AAL shares are up 31%, from a level of $13 in early 2023 to $17 now. This can be attributed to the following:

1. A 168% Increase in the company’s adjusted profit from $0.50 in 2022 to $1.34 now; partially balanced by
2. A 51% Decrease in the company’s P/E ratio 25x in 2022 until 12x Now;

Let’s delve deeper into these factors. Regardless, if you want an uptrend with a smoother trajectory than an individual stock, consider the following: High quality portfolio, which has outperformed the S&P and returned >91% since inception.

What drove American Airlines’ earnings growth?

American Airlines’ 168% profit growth since 2022 was driven by a mix of higher revenue and margin expansion. American Airlines Earnings rose from $49 billion in 2022 to $54 billion now. Airlines as a whole saw a sharp increase in demand for air travel following the pandemic. American Airlines capacity has increased 12% from 260 billion in 2022 to 291 billion now. The company’s utilization increased during this period; However, average yields have declined.

Not only did the company grow its revenue, its adjusted net margin also increased from 0.7% to 1.7% over the same period. Higher sales and margin expansion drove earnings to $1.34 per share in the last twelve months, up from $0.50 per share in 2022.

What’s behind the falling valuation multiple?

Investors have been punishing American Airlines stock recently because of its thin margins. Although the net margin has increased since 2022, it is well below pre-pandemic levels of around 5%. In fact, the company’s adjusted net profit margin was better at 3.5% in 2023 and saw a decline in 2024. Higher operating costs, excess capacity and increased price competition are some of the factors that have weighed on American Airlines’ situation. Profitability recently.

More importantly, investors are not happy with American Airlines’ high level of debt. With a massive debt of $39 billion, the company’s debt-to-equity ratio is 370%. The Fed’s interest rate cuts bode well for American Airlines as the company’s profitability will improve with lower interest costs.

Does AAL stock have room for growth?

At its current price of $17, AAL stock is up 22% this year and we believe it is now fully valued. It is noteworthy that AAL shares have underperformed the overall market in each of the last three years. The stock’s returns were 14% in 2021, -29% in 2022, and 8% in 2023. In contrast, the Trefis High Quality Portfolio is less volatile with a collection of 30 stocks. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, the stocks in the HQ Portfolio offered better returns with lower risk compared to the benchmark index. less of a rollercoaster ride, as the key performance indicators of the HQ portfolio show.

Given the current uncertain macroeconomic environment surrounding interest rate cuts and geopolitical conditions, could ALK stock see higher values? We appreciate American Airlines Review to $15 per share, down about 10% from current levels of $17. Our forecast is based on 11x adjusted earnings of $1.34 per share, which is lower than the stock’s average P/E of 15 over the past two years. We believe that a decline in American Airlines’ valuation multiple appears justified given the company’s very high level of debt. The deal with Citibank will help the company generate more cash flows and reduce its debt in the coming years. This has led to a slight optimism, which is reflected in the appreciation of stocks. We believe investors will be better off choosing other airline stocks for better long-term gains. For example, Alaska Air stock appears to be better positioned in terms of financial risk than American Airlines.

Even though AAL stock appears to be fully valued, it’s helpful to see how The colleagues from American Airlines Fare for important metrics. You can find further valuable comparisons for companies in all industries at Peer comparisons.

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