American Airlines Book Value Rising Faster Than Its Debt, Says Buckingham

Recent Performance And Expectations

"AAL has adopted a deliberate strategy of using aircraft financing, resulting in higher leverage, to buy back its stock," analyst Daniel McKenzie wrote in a note.

McKenzie noted that comparing adjusted net debt to total adjusted capital, leverage actually set to fall to 68 percent in 2017 (from 74 percent in 2016) on book equity, boosted along by record profits.

On secondary leverage metrics, gross adjusted debt to EBITDAR is 4.5x on Buckingham's 2017 outlook, contrasting a 30-year average of 6.1x, all while the net adjusted debt to EBITDAR is 3.0x.

Related Link: American Airlines' June Load Factor Falls To 84.9%

In the second quarter, American Airlines repurchased $1.7 billion in stock (50.2 million shares) at about $33.86, leaving about $1.1 billion in the program as of June 30, 2015.

The analyst noted that, so far, American Airlines has returned $9.1 billion to shareholders and retired 29 percent of the stock, and is set to return another $6 billion through 2017, totaling roughly 30 percent of the market cap.

Following American Airlines' June traffic release, the analyst raised his second-quarter EPS estimate by 15 percent to $1.72 (consensus: $1.64), and after separately factoring in the airliner's new credit card deal, he increased his 2016/2017 EPS by 9 percent/2 percent respectively to $5.25 (for both periods). The Street expects EPS of $5.26 for 2016 and $5.12 for 2017.

Looking Toward The Future

That said, the analyst cut his 2017 revenue forecast by $1 billion on Brexit concerns as roughly 6 percent of American Airlines' flying is exposed to the U.K.

"At this point, we're not seeing a demand impact, a potential source of EPS upside if current trends continue," McKenzie highlighted.

McKenzie continued that the stock is poised for better performance, driven by easier comps and the revenue trends are set to improve from a better supply/demand dynamic in the second half of 2016.

"At 6.6x our 2017 EPS (a 5 percent/24 percent FCF yield based on a gross/net CAPEX outlook), the stock is a bargain, the basis for our BUY rating despite our below consensus outlook," the analyst added.

Shares of American Airlines closed Thursday's regular trading session at $35.88 and were down 0.7 percent on Friday at time of writing, trading at $35.63. McKenzie raised the price target by $2 to $44, implying a potential return of 23 percent.