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American Airlines: Insulated Bargain

Summary

American Airlines generated huge Q1 pre-tax profits while the market focuses on PRASM declines.

The airline continues to dramatically reduce the share count as the low stock valuation greatly enhances any share repurchases.

The stock is insulated from a large earnings decline at this valuation.

On Friday, American Airlines Group (NASDAQ:AAL) dropped 4.5% after reporting Q1 earnings. The market again appears obsessively focused on short-term PRASM (passenger revenue per available seat mile) issues and missing the big picture.

Source: American Airlines Q116 presentation

The stock has now spent the better part of the last year stuck in a rut between $36 and $46 while the airline churns out billions in profits each quarter. Is the stock now an ultimate bargain as the catalysts are in place for an upside rally while the market fears the historical downside risk?

Big Picture

While the market focuses on the 7.5% decline in Q1 PRASM, American Airlines generated a substantial pre-tax profit of $1.2 billion. The market is completely and utterly missing that the PRASM declines this time around are directly related to lower fuel costs and currency impacts. As both issues start subsiding during Q2, the PRASM story will naturally improve on its own.

The other issue with the Q1 results were the confusing inclusion of tax costs that weren't actually paid. In essence, American Airlines produced a record $1.99 in adjusted profits though only reported...


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