No other stock appears to garner such unfavorable obsession as American Airlines Group (AAL). As my prior study discussedthe airline has too much money and, obviously, lots of access to additional funds, yet the overall investment thesis isn’t just negative but also calling bankruptcy. The market stays so obsessed with all the downsides on the airline the positives are discounted. Picture Resource: American Airlines site Debt Obsession American Airlines finished Q2 with a cash equilibrium of $10.2 billion and increased an additional $1.2 billion while using this loan App in the CARES Act payable to $4.75 billion. In total, the company has pro forma liquidity of $16.2 billion. The market is so obsessed with debt that analysts constantly review the debt portion of the debt equation while completely ignoring cash or corresponding assets. A prime example was the comment from Cowen analyst Helane Becker on the Q2 earnings call regarding debt: So, does it make sense to figure out a way to return those aircraft or somehow figure out a way to get out from under this $50 billion in debt that you have on the balance sheet that at some point has to be repaid? The analyst didn’t even bother addressing the expected cash or asset position from accumulating all of that debt. Due to significant reductions in daily cash burn rates, American Airlines predicts ending Q3 with ~$13.0 billion in liquidity. Per CEO Doug Parker on the Q2 earnings call:
With regard to conserving cash and our cash burn, our daily cash burn rate for the quarter was around $55 million, which was better than our prior guidance of $70 million per day. We were particularly pleased with the rate of improvements. That daily burn was nearly $100 million per day in April, then around $56 million in May, and was $30 million for — per day for the month of June. Considering the airline is already predicting cash burn rates to improve from $900 million monthly rates or $2. )7 billion quarterly rate in June, American Airlines will have far in excess of $13.0 billion in liquidity at the end of September when the quarter ends. A more likely daily cash burn rate of only $15 million places the liquidity balance closer to $14.5 billion. The cash balance is substantial for a business approaching cash flow breakeven by the end of 2020 before any normalization of air passenger traffic. For the last weekend, TSA passenger levels starting rebounding in a sign that demand might survive further fears on the virus as air traffic has proven safe. As highlighted above, most of the bears on the stock like to spout off the total debt levels, but most fail to pay attention to assets. American Airlines entered this crisis with the largest cash balance and will enter Q3 with a ton of cash. The airline ended Q2 with a net debt balance of only $21.5 billion while having a PP&E value of $33.4 billion. Data by YCharts An important aspect of the recent debt offerings and the potential loan from the U.S. Treasury is that the cash goes directly into their bank account. The money doesn’t add to the net debt levels until the airline burns the cash via the daily cash burn discussed above.
The marketplace is clearly overly obsessed with debt levels while ignoring the cash and equipment values. Though the debt amounts are high, American Airlines is poised to repay a large amount of debt just from the cash balance and can recover with improving traffic trends. So Many Negative Analysts One only needs to look at the average author rating on Seeking Alpha to understand my claim of the professional analyst being far too negative on the stock. Outside of my bullish calls on American Airlines, no other author on the site over the last 90 days has been bullish on the stock. In fact, 7 authors are Bearish or Very Bearish on the stock with 4 Neutral. The average rating is a remarkably low 1.9 when excluding my Very Bullish rating. Source: Seeking Alpha author ratings Wall St. analysts aren’t much different. The average rating has dipped to only 2.8 with only 4 ratings Bullish or Very Bullish and the other 16 ratings Neutral or worse. Investors probably won’t be surprised to find out which analysts were most bullish in October 2018 shortly after the stock dipped below $50. Analysts are now the most bearish after the stock has collapsed. Analyst calls appear to just follow the stock price in a contrarian bullish indicator. Source: Wall St. analyst ratings All of these analysts and authors upgrading the stock down the road will lead to a bullish run in American Airlines. Takeaway The key investor takeaway is that the analyst community remains far too negative about the stock. American Airlines is far closer to cash flow breakeven than expected at only 27% of 2019 passenger levels per the TSA, yet the market keeps predicting dire outcomes for the stock. The airline can’t be so bad to justify only negative ratings.
As the market starts realizing that American Airlines doesn’t have outrageous net debt levels, the stock will rally. The airline was on an EPS path of $4 to $6 before the virus shutdown, and the company should be able to use improving yields and lower fuel costs to offset some of the share dilution and higher interest expense to normalize not far below those previous EPS estimates. The stock is a buy near $10 here.
DisclosureI am/we are long AAL. I wrote this article myself, and this expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss principal.