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Here's What It Will Take For Over 50% Upside At American Airlines

Summary

American Airlines has a debt problem that is suppressing the stock price.

A look deeper shows a linear relationship between debt/equity ratio and an airlines' forward P/E.

American Airlines' CEO has shown a willingness to adapt - something that could be welcomed by Wall Street when it comes to the current stance on debt.

Img 1: American Airlines Stock Performance Since Merger; Source: Google Finance

American Airlines (NASDAQ:AAL) shareholders have sat in frustration as they watch the stock price stagnate and the airline trade at a mere 3.6 P/E despite a fall in jet fuel price, record earnings and continued consolidation in the airline industry. The stock soared in the initial months after the merger was completed, and then fell to $28 as much of the media speculated the potential of Ebola to disrupt world travel. After the stock rebounded, it reached new highs of over $55 before low oil even came into the picture. With oil under $100 and falling, the stock price steadily fell to within a range of roughly ~$40-45 despite record earnings and continued positive developments during this time. The stock has remained within this rough range for well over a year now.

American Airlines has taken advantage of the situation to launch extensive buybacks. CEO Doug Parker has expressed confidence in the stock, both saying it is a no-brainer for the company to buy back stock at these price levels and also becoming the first ever airline CEO to take his pay in his airline stock - a major validation. There are many issues keeping the stock price of AAL and the overall airline industry down, as many Wall Street analysts are still skeptical of the long-term viability of strong airline profits given the industry's turbulent past. One thing, however, seems to stand out above all others in potentially allowing American Airlines stock to gain 50% or more.

Debt

Debt stands out above all other as one major reason that AAL is trading at a discount compared to its peers. The company has by far the largest debt burden out of all the major U.S airlines. Its debt is currently as follows:

Noncurrent Liabilities 2015 2014
Long-term debt and capital leases, net of current maturities 18,330 16,043
Pension and post-retirement benefits 7,450 7,562
Deferred gains and credits, net 667 829
Bankruptcy settlement obligations 193 325
Other liabilities 2,535 3,041
TOTAL 29,175 27,800

When pressed, CEO Doug Parker has continually reaffirmed that it makes sense to take on additional debt when interest rates are under 4%, as he can earn a return above and beyond 4% on the debt. In theory, his point...


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