American Airlines stock (NASDAQ
NDAQ
: AAL) currently trades at $15 per share, more than 40% below its level in June 2021, and it seems like it can see higher levels over time. American Airlines, one of the largest players in the country’s airline industry, saw its stock trading at around $25 in early June 2021, just before the Fed started increasing rates, and is still 40% below that level. The stock has gained 15% since its low in September 2022 compared to the S&P 500, which gained about 6% during this period. The rally in the stock over recent months has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession. The notable increase in American Airlines’ revenues over recent quarters has also contributed to the stock recovery.
Returning to the pre-inflation shock level means that AAL stock will have to gain more than 65% from here. However, we do not believe that will materialize any time soon and estimate American Airlines’ valuation to be around $16 per share, implying over 15% gains. This is because the company has higher debt levels, and its operating margin of 7.3% in 2022 is still below its pre-pandemic levels. With elevated fuel costs, the company may see slower earnings growth in the near term. We believe that the adjusted earnings will likely remain below its pre-pandemic figure of $3.79 (2019) in 2023 as well as 2024.
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