With More Debt Than It Can Handle, Avoid American Airlines Stock

Stocks to consider selling

What in store for American Airlines (NASDAQ:AAL) post-pandemic? Sure, a rapid comeback in AAL stock is possible. But, compared to other airline plays, it faces a tougher road ahead.

American Airlines plane on ramp in Chicago Airport.

Source: GagliardiPhotography / Shutterstock.com

How so? Firstly, one could argue that low-cost carriers like Southwest (NYSE:LUV) are better airline recovery plays. Secondly, the airline faces more hurdles than even its rival legacy peers. Deemed an “sector laggard” by JPMorgan’s Jamie Baker, Delta (NYSE:DAL) and United (NASDAQ:UAL) have a much better shot at recovery.

And this on top of the overarching issues still plaguing the sector. Back in early June, speculators may have been betting on a swift novel coronavirus recovery. But, as the pandemic still lingers across the U.S., it’s clear things aren’t going “back to normal” this year.

Investors have gotten the message, sending AAL stock closer to prior lows. Yet, things may not be bottoming out just yet. There could be additional stimulus around the corner for airlines. But, that may not be enough to shore things up.

Granted, American isn’t doomed for bankruptcy. However, as bad times linger, it’s hard to see shares heading higher from today’s prices (around $11.30 per share).

AAL Stock and the Long Recovery

Overall, the analyst community remains mixed on airline stocks. But for American in particular, analyst sentiment is mostly bearish. Analysts like Citigroup’s Stephen Trent and Raymond James’ Savanthi Syth have both rated shares the equivalent of “sell.”

UBS’s Myles Walton is also bearish on American. Namely, due to how there’s “no more room to go on costs.” And, if cost-cutting has been maxed out, it’s hard to see how this struggling carrier gets through what could last several years.

June’s expectations of an airline recovery before year’s end seem like a distant memory. The new consensus is that air travel won’t “return to normal” until at least a vaccine becomes widely available.

In other words, things may not improve much in the near-term from where they are today. Sure, the airline’s situation has improved from where it was back in the spring. As InvestorPlace’s Todd Shriber wrote Jul 27, cash burn for American has come down from $100 million per day in April to just $30 million per day in June.

Yet, $30 million per day is about $900 million per month. A staggering amount for an company with just a $5.8 billion market capitalization. Add in the company’s enormous debt load (more below), and its obvious the company isn’t out of the woods yet when it comes to Chapter 11.

Liquidity raises from earlier this year may have minimized this risk. But, if a depressed air travel market continues into 2021, the airline’s second bankruptcy in ten years seems possible.

Is Bankruptcy Risk Still on the Table?

As this pundit noted, American’s weak balance sheet is getting even weaker. As it stands now, the airline has around $46 billion in debt, lease, and pension liabilities. But, with the company’s continued borrowing to boost liquidity, this amount will rise to above $50 billion by year’s end.

Simply put, the airline needs the rapid “return to normal” that has yet to materialize. Granted, something like a widely available vaccine could quickly turnaround its fortunes, enabling it to retrace prior revenue levels. At that point, cash flow would go back to positive, and American could start getting back on track.

But, even with five vaccines in Phase 3 trials, there’s no guarantee we’ll have a coronavirus vaccine by 2021. Without a vaccine, or at least another game-changing solution to the pandemic, it’s doubtful American quickly bounces back in a year’s time.

Also, what’s to say the air travel industry recovers, but American still heads into Chapter 11? As this commentator recently wrote, the airline managed to survive the Great Recession. But, it wasn’t enough to avoid Chapter 11 bankruptcy. The company debt burden then was too big to handle.

It could be the same situation now with the coronavirus and the company’s debt burden. With this in mind, bankruptcy risk should still be a top concern.

As Shares Approach Single Digits, Avoid AAL Stock

Even negative sentiment around the airline space right now, it may be tempting to make a contrarian play. But, while other airline stocks may offer that opportunity, don’t count American stock as one of them.

Sure, cash burn is coming down. Capital raises may extend how long the carrier can last with depressed capacity. Yet, unless the airline sees a rapid rebound in the next year, it’s current (and rising) debt load could become too much to handle.

Whether that means Chapter 11 or not remains to be seen. But, avoid AAL stock for now, as it could head back to single-digits.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Products You May Like

Articles You May Like

Could Carnival Stock Retest Lows as Sailings Get Delayed? 
Crude Oil Is A Tightly Coiled Spring
5 Top Stock Trades for Tuesday: CHWY, ATVI, WKHS, TSN, CLX
Learning How to Find the Target and Stop
Will Natural Gas Continue to Surge?

Leave a Reply

Your email address will not be published. Required fields are marked *