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Morgan Stanley: American Airlines' Pricing Story Has Begun To Play Out

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Morgan Stanley: American Airlines' Pricing Story Has Begun To Play Out

Morgan Stanley remains Overweight on American Airlines Group Inc (NASDAQ: AAL) on favorable pricing dynamics, strengthening revenue narrative, firm grasp on costs and continued supply discipline.

"The pricing narrative is the most compelling reason to own American from here," analyst Rajeev Lalwani wrote in a note.

Lalwani said the airline is showing signs of relative improvement in revenue following two years of underperformance. This begins to materialize through 2H16 with 400+ bps of year-over-year improvement in 2017 as RASM outperforms.

Further, the carrier's top line would benefit from initiatives such as yield management, cabin segmentation, credit card agreement and improved connectivity.

Related Link: How Did Airliners Perform In July?

Of note, Lalwani said the company's margins would show resilience versus the industry amid labor costs and rising fuel prices. The analyst expects American's margins to fall only about 200bps in to 2017 versus the estimated industry operating margins drop of nearly 250bps.

"At AAL, revenues should receive support from abating pressures and the introduction of initiatives while ex-Fuel costs appear manageable given the state of labor negotiations (essentially completed) vs. the rest of the industry," Lalwani noted.

On the valuation front, the analyst said shares are more likely to trade on a P/E basis, which screens more attractive on an absolute basis with American at about 8x vs. peers of about 7.5x.

Shares of American closed Wednesday's trade at $36.60. Lalwani's price target of $41 represents a potential upside of 12 percent.

Since mid-year, American shares have risen an impressive 30 percent and the analyst sees the "progress of late as just the beginning of momentum ahead."

At time of writing, American Airlines shares were down 0.41 percent on the day, trading at $36.45.

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Latest Ratings for AAL

DateFirmActionFromTo
Jun 2020Seaport GlobalInitiates Coverage OnBuy
Jun 2020CitigroupMaintainsSell
Jun 2020Raymond JamesDowngradesMarket PerformUnderperform

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