With a daily gain of 3.68% and a modest 3-month gain of 2.05%, American Airlines Group Inc (AAL, Financial) presents an interesting case for investors seeking value in the turbulent airline industry. Currently trading at $14.93 per share with a market cap of $9.80 billion, the stock's modest gains contrast with its Earnings Per Share (EPS) of 0.6. This analysis aims to determine whether American Airlines Group is indeed modestly undervalued as suggested by the GF Value of $18.56.
Company Overview
American Airlines Group Inc (AAL, Financial), the world's largest airline by aircraft capacity and scheduled revenue passenger miles, operates major US hubs including Charlotte, Chicago, Dallas/Fort Worth, and Los Angeles. With over 30% of US airline revenue from routes connecting Latin America to the United States, the company has recently completed a major fleet renewal, achieving the youngest fleet among US legacy carriers. This strategic position prompts an evaluation of its stock against the GF Value, an estimation of fair trading value, to uncover potential investment opportunities.
Understanding GF Value
The GF Value is a proprietary measure calculated by GuruFocus to estimate the intrinsic value of a stock. It incorporates historical trading multiples such as PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, along with a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. A stock priced below this value is typically considered undervalued, suggesting a potentially higher future return. Currently, American Airlines Group's stock price of $14.93 is below the GF Value of $18.56, indicating it is modestly undervalued.
Financial Strength and Risk
Investigating the financial strength of American Airlines Group reveals a cash-to-debt ratio of 0.21, which is lower than 70.79% of companies in the Transportation industry. This indicates a higher risk of capital loss, which is critical for investors to consider. The company's overall financial strength rating of 4 out of 10 reflects its precarious financial situation, exacerbated by significant debt levels.
Profitability and Growth Prospects
Despite financial challenges, American Airlines Group has maintained profitability over the past decade. With a revenue of $53.20 billion and an operating margin of 6.83%, its profitability ranks fair. Growth is crucial, yet the company's 3-year average EBITDA growth rate stands at 0%, highlighting stagnation in earnings before interest, taxes, depreciation, and amortization.
ROIC vs. WACC
Evaluating American Airlines Group's efficiency in generating cash flow relative to the capital invested involves comparing its Return on Invested Capital (ROIC) of 3.98 to its Weighted Average Cost of Capital (WACC) of 5.3. A ROIC below the WACC suggests that the company is not creating adequate value for its shareholders, which is a concern for potential investors.
Conclusion
While American Airlines Group (AAL, Financial) appears modestly undervalued according to the GF Value, its financial health and stagnant growth rate pose significant risks. Investors should weigh these factors carefully against the potential for long-term returns. For a deeper dive into American Airlines Group's financials, visit 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
