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Goldman Sachs Downgrades American Airlines Group Inc (AAL), Reduces Price Target

By Kate George

Throughout the current year, investors have been concerned about the performance of airline stocks given fears related to overcapacity on flights. American Airlines Group Inc (NASDAQ:AAL) has reduced its forecasted year-over-capacity growth to 1%, from its earlier estimate of 2%. In light of these developments, Tom Kim of Goldman Sachs weighed in on the stock.

Yesterday, Kim downgraded American Airlines to Neutral from Buy. Sharing his reasons behind this downgrade, he said, “Declines in unit prices have undermined this year’s share performance for the Airlines, causing the re-rating to pause. Our airline coverage is down 5.6% ytd, and the sector is now trading at only 8.4x 2016E P/E and 4.2x EV/EBITDA. We believe these valuations imply much greater risk to earnings than we think is justified.”

However, he has given credit to the airlines for the way it has utilized fuel savings. Kim said, “We think Airlines should be given credit for their disciplined capital allocation to date. In 2Q15, about 60% of the fuel savings went toward buybacks.”

While the analyst is optimistic about the airline sector overall, he feels American Airlines stock has a higher upside within his coverage. “On our estimates, American Airlines stock still has significant 12% potential upside to our six-month price target of $44 (from $48).” Kim adds, “We downgrade the stock to Neutral because there is greater upside potential within our coverage universe.” While the analyst is hopeful that the stock will gradually rerate and trade higher over the long term, this would be way beyond his valuation time horizon of 6 months.

Talking about other airlines, Kim was positive about Delta Air Lines, Inc.’s performance and said, “From buying secondhand planes to investing in airline partnerships like Virgin Atlantic, Delta is thinking outside of the box to generate superior returns.” He also expressed satisfaction about the operational progress shown by United Continental, while acknowledging the market hasn’t fully recognized it.

Based on ratings of 8 analysts on TipRanks who have recently rated American Airlines, 6 have rated the stock as a Buy while 2 have rated it as Hold; none of them have recommended to Sell the stock. The 12-month consensus price target for American Airlines is $55.71, marking a 43% potential upside from current levels.