Why American Airlines Should Grace Your Portfolio

Shares of the American Airlines Group AAL have performed very well, outperforming the Zacks categorized Transportation-Airline industry in the last three months. Shares of this Fort Worth, TX-based carrier have rallied 17.6%, compared with the industry's gain of 10.4% in the same period.

Encouraging Unit Revenue Guidance

The stock has been buoyed by the company's bullish view on unit revenue and adjusted pre-tax margin for the second quarter of 2017. Total revenue per available seat mile (TRASM: a key measure of unit revenue) is expected to increase in the band of 3.5% to 5.5% on a year over year in the same quarter.

Notably, the company had also performed well in the first quarter with respect to TRASM. The metric had improved 3.1% in the quarter. In fact, this quarter marked the second successive one in which the metric grew on a year-over-year basis, since the fourth quarter of 2014. 

Pre-tax margin (excluding special items) is projected to be in the range of 12% to14% in the second quarter of 2017.

Other Bullish Factors

We are impressed by the company's efforts to reward shareholders through share buybacks and dividend payments. During the first quarter, the company returned $563 million to its shareholders through the payment of $51 million in dividends and buyback of shares worth $512 million. The carrier has returned more than $10.2 billion to stockholders through share repurchases and dividends since mid-2014.

Moreover, this TX-based carrier's efforts to modernize its fleet are impressive. Its May traffic report also raises investors' optimism in the stock.

In fact, the company's expansion plans are encouraging as well. To this end, American Airlines recently purchased a minority stake in China Southern Airlines ZNH. It has invested approximately $200 million in the Hong Kong-listed shares of China Southern. We believe, this move to expand in China to be prudent one as the country is projected to become the largest aviation market by 2024.

Estimate Revisions

Upward estimate revisions reflect optimism in a stock's prospects. American Airlines scores impressively on this front with the Zacks Consensus Estimate for the second quarter climbing 6.9% over the last 60 days. Likewise, the Zacks Consensus Estimate for the full-year 2017 has moved up 5.2% to $4.82 per share in the last two months.

Earnings History & Bullish Q2 Expectations

American Airlines has an impressive earnings track record having outshined the Zacks Consensus Estimate in three of the last four quarters with an average beat of 20.24%. In fact, we expect the company to perform impressively in the second quarter of 2017 as well.

Our quantitative model shows that American Airlines is likely to beat earnings in the second quarter because it has the perfect combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better – to increase the odds of an earnings surprise.

Zacks ESP: American Airlines has an Earnings ESP of +8.24%. This is because the Most Accurate estimate exceeds the Zacks Consensus Estimate of $1.70 per share by 14 cents. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter.

Zacks Rank: American Airlines holds a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Valuation & Style Score

In terms of enterprise value EV to EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio, which is often used to value airline stocks, given their significant debt levels and high depreciation and amortization expenses, American Airlines' valuation looks attractive.

Currently, the carrier has a trailing 12-month EV/EBITDA ratio of 5.65, which compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is at 10.94 and the median level (over the last one year) is 10.36. In fact, the stock's favorable positioning compared with the overall market certainly signals more upside. 

Additionally, the stock has an attractive VGM Score of ‘A'. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Other Stocks to Consider

Investors interested in the airline space may also consider Ryanair Holdings RYAAY and Deutsche Lufthansa AG DLAKY sporting a Zacks Rank #1.  

Shares of Ryanair and Deutsche Lufthansa have rallied over 28% and 44%, respectively, in the last three months.

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Ryanair Holdings PLC RYAAY: Free Stock Analysis Report
 
Deutsche Lufthansa AG (DLAKY): Free Stock Analysis Report
 
American Airlines Group, Inc. AAL: Free Stock Analysis Report
 
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