Is American Airlines Group, Inc. (AAL) a Hot Buy?

American Airlines (AAL), which steadily improved its balance sheet, reported a robust financial performance during the first quarter of fiscal year. As the U.S. airlines are expected to make profits this year, it may be a good idea to invest in this stock despite economic uncertainty. Read more.

AAL, the leading airline in the United States, has seen its financial performance improve despite persistent macroeconomic headwinds. The company reported a profit in the first quarter 2023 after four years of challenges. This was due to the robust demand for air travel.

This article will examine the financial data and factors that have influenced AAL's recent performance in order to provide insight into the investment potential of this airline giant. Let's first take a look ahead at the US airline industry outlook for this year.

The International Air Transport Association (IATA) predicts that the aviation industry will achieve a profit of $4.70 Billion in the current fiscal year. This is accompanied by an increase in passengers, which has surpassed 4 billion. The relaxation of travel restrictions is causing a surge in demand.

AAL achieved record operating and cash flow free of $3.30billion and $3billion in the first quarter. The company continues to place a high priority on strengthening its balance sheet. AAL has approximately 60% of its debt reduction goal by 2025.

AAL also expects that, based on the current fuel prices and demand trends, its adjusted earnings per share for the second quarter of 2023 will be between $1.20 to $1.40. The company anticipates that its adjusted earnings per share for the full year 2023 will be between $2.50 to $3.50.

The stock closed its last trading session with a gain of 8.5% over the year and 3.6% in the past month.

What could affect AAL's performance over the next few months?

Robust financial performance

AAL's passenger revenues and other operating revenue grew by 42% and 20,4% respectively year-over-year in the first fiscal quarter ending March 31, 2023. The company's operating revenue increased by 37% over the previous year to $12.19 Billion. Operating income was $438 million compared to a loss of $1.72 Billion in the same quarter last year.

AAL also reported a $33 million net profit, or $0.05 per common share, when excluding the net special items. This compares to a $1.51 billion net loss, or $2.32 a share, in the same quarter of last year.

Improve Balance Sheet

AAL had reduced its total debt by more than $850 million since the end of the quarter, March 31, 2023. The total debt had also been reduced by over $9 billion since the peak in 2021.

The company also ended the quarter with an estimated $14.4 billion in total liquidity. This includes cash, short-term investments, and capacity that has not been drawn down under short-term and revolving credit facilities.

Low-than-Industry Value

AAL's forward non-GAAP PE multiple is 5.23x. This is 67.4% less than the industry average, which is 16.03x. The stock's non-GAAP PEG forward multiple of 0.05, is 96.7% less than the industry average 1.50x. The stock's P/S multiple and EV/Sales multiplier are also lower than industry averages, which are 1.60x and 1.27x respectively.

High Profitability

AAL's CAPEX/Sales ratio for the trailing-12 months of 4.98%, is 71.1% greater than the industry average CAPEX/Sales ratio of 2.91%. Cash from operations for the trailing 12 months is $4.32, which is higher than the industry average of $207 million. The stock's ROTA trailing 12-month of 7% is 3.3% more than the industry average.

AAL's overall rating is B, which is equivalent to a Buy on our POWR Ratings System. POWR Ratings is calculated by weighing 118 factors to the optimal degree.

The proprietary rating system we use also assesses each stock on the basis of eight categories. AAL's high profitability is reflected in its B grade for quality.

The stock's B grade for Growth is consistent with the impressive results it achieved in the prior quarter. AAL's valuation multiples are lower than the industry average, which also justifies its B grade for Value.

AAL ranks #8 out of 27 stocks in the B rated Airlines Industry.

Click here to view additional AAL POWR (Momentum Stability and Sentiment) ratings.

AAL's EBITDA and EBIT have increased at CAGRs between 25,2% and 12,6% in the last three years. Over the last three years, its revenue and normalized gross income grew at CAGRs between 6.2% and 28.5%.

The airline's long-haul international demand has been strong this year, as well as its domestic revenue.

The company's positive projections for the next quarter and its full-year 2023 show that it is confident in its ability. I believe the stock is a good buy right now.

AAL's overall POWR rating is B, which equates to a Buy recommendation. Other stocks in the Airlines sector with A (Strong buy) and B ratings include Qantas Airways Limited, Air France-KLM SA and Deutsche Lufthansa AG.

AAL shares traded at $14.01 on Thursday morning. This was up $0.21 (+1.52%). AAL shares have risen by 10.14% year-to-date compared to the 8.44% increase in the benchmark S&P 500 Index during the same time period.

About the Author: Kritika Saarmah

Kritika's passion for writing and interest in risky financial instruments made her an analyst and journalist. She has a bachelor's in commerce, and is currently studying for the CFA. She hopes to identify investment opportunities that are not being explored by investors using her fundamental approach.