It will come as a surprise to no one that American Airlines’ (AAL) latest quarterly statement failed to provide much cheer. However, expectations were lowered to such an extent that in the worst quarter in the company’s history, the beleaguered airline managed to beat the estimates.
While revenue dropped by a massive 86.5% to $1.62 billion, the figure managed to beat the forecast by $100 million. A loss per share of $7.82 came in ahead of the consensus estimate by $0.08. However, the beats can’t detract from an overall net loss of $2.1 billion.
The average daily cash burn for the June quarter was $55 million, besting the initial forecast of $70 million, as the $100 million daily cash burn in April was reduced to $30 million in June. That said, looking ahead, the recent spike in COVID-19 cases means improved May-June trends have been offset by a weak July, and the company plans on reducing Q3 capacity by 60%, compared to the same period last year.
Following a series of capital raises in the quarter, the ailing airline ended Q2 with $10.2 billion of available liquidity, up by $3.4 billion from the end of Q1. Recent deals have brought liquidity up to $16.2 billion, and AAL is guiding for $13 billion-worth of liquidity by the end of Q3.
So, with the virus still raging hard and no end in sight just yet, is now the right time to invest in AAL? Surprisingly, it is, according to Deutsche Bank analyst Michael Linenberg.
With a promise to “deploy all free cash flow (once achieved) to retiring debt,” the 5-star analyst remains “constructive on the name,” and said, “Although American will emerge from the pandemic with a heavy debt burden, we are encouraged by the company’s favorable debt maturity profile, which does not indicate any large debt maturities until a $750 million term loan due June 2022. Moreover, while future interest expense will increase due to recent capital raises (approximately several hundred million higher in 2021 than 2019), the company managed to borrow at relatively attractive rates with a weighted average cost of debt of just over 4%”
Therefore, Linenberg reiterated a Buy rating on AAL shares along with an $18 price target. Investors could be pocketing a 54% gain, should Linenberg’s thesis play out over the next 12 months. (To watch Linenberg’s track record, click here)
The rest of the Street is not quite as confident. A Hold consensus rating is based on 3 Buys, 3 Holds and 6 Sells. However, the average price target of $13.25 indicates there is potential for a 14% uptick in the year ahead. (See American Airlines price targets and analyst ratings on TipRanks)