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American Airlines: Warren Buffett Is Not Always Right - TipRanks Financial Blog
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American Airlines: Warren Buffett Is Not Always Right

While Warren Buffett abandoned the airlines, the numbers don’t support abandoning the sector or American Airlines (AAL). The stock trades at the lows despite strong government aid and plenty of financial liquidity to survive the depressed air travel in the U.S.

The market is focused on some of the negative headlines, but daily air passenger totals are starting to make a nice rebound. The ultimate value of an airline stock or American Airlines in general is based on the willingness of passengers to return to the skies. With the proper focus, investors will find the prospects for American Airlines heading higher.

According to TipRanks, the consensus on Wall Street is that American Airlines stock is a “sell” for investors. But TipRanks might as well have said “buy” — because analysts, on average, think the stock, currently at $9.25, could zoom ahead to $13.82 within a year, delivering 50% profits to new investors.

Buffett Versus Passengers

Over the weekend, Warren Buffett disclosed that Berkshire Hathaway had unloaded positions in the four major airlines with a total value once topping $10 billion. At the same time, the TSA checkpoint traveler totals are surging over 30% on a weekly basis.

The passenger traffic levels are still down about 93% from 2019 levels, but the daily numbers have doubled off the lows already with 170K passengers flying over the weekend. At the same time, Buffett sold airline stocks at the lows during April as if passenger traffic wouldn’t rebound. His message to bet on America would seem to apply strongly to American Airlines and other legacy airline stocks of Delta Air Lines (DAL), United Airlines (UAL) and Southwest Airlines (LUV) sold by Berkshire Hathaway.

Plenty Of Liquidity

American Airlines ended Q1 with $6.8 billion of available liquidity and has access to another $10.6 billion from the U.S. Treasury via the CARES Act. The airline has already agreed to the deal for the Payroll Support Program which includes $4.1 billion via a grant and another $1.7 billion via a low-cost loan. The additional $4.75 billion secured loan is still in negotiations based on determining the assets to secure the loan.

The biggest question is how quickly passenger traffic can grow to cut the current daily cash burn rates. American Airlines was burning $70 million daily on a path to $50 million by the end of the June.

The misleading aspect here is the $4.1 billion grant portion of the CARES Act. The grant requires the airline to keep a higher payroll cost where the airline would actually would currently have much lower costs, if not for this government move.

Once factoring in this grant to cover daily payroll costs, American Airlines would only have a daily cash burn below $30 million by the end of June. In addition, the airline isn’t even factoring in a revenue boost from the higher revenues from a rebound in passenger demand which wasn’t factored into the daily cash burn estimates.

Just a return to revenues in the 20% to 30% levels quickly reduces the daily cash burn levels to negligible amounts.

Takeaway

The key investor takeaway is that American Airlines stock still remains in a risky position until bookings start reaching much higher levels than 7% of previous capacity. Buffett selling airlines at a loss doesn’t alter my bullish view on the sector.

The airline sector was highly profitable prior to the virus outbreak and American Airlines trades at 2x previous EPS. Even a hit to share dilution and higher interest expenses don’t alter the valuation equation much with the stock below $10.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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