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AAL to Exit S&P 500: How Should Investors Play the Stock Now?
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American Airlines (AAL - Free Report) will cease to be a member of the S&P 500 from Sept. 23. After exiting the coveted index, the airline become part of the S&P MidCap 400 index. The change is part of the S&P 500 index’s quarterly adjustment process and reflects AAL’s overall loss of market capitalization over time. AAL's market capitalization, as of Sept. 16, 2024, was $7.1 billion, down drastically from around $37 billion in December 2014.
Post Sept. 23, only three airline stocks will remain in the S&P 500 index — Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) and Southwest Airlines (LUV - Free Report) .
The erosion of market cap over time and the subsequent exit from S&P is hardly surprising, given the disappointing price performance of AAL stock. Over the past year, AAL shares have not only declined in high-double-digits but also underperformed its industry and the three airlines mentioned above.
One-Year Price Performance
Image Source: Zacks Investment Research
American Airlines' technical indicators suggest that further downside could be ahead. The stock has been trading below the 200-day moving average, a key technical level often used by traders to gauge momentum.
200-Day Moving Average Signals Bearish Trend
Image Source: Zacks Investment Research
Major Headwinds That Are Hurting AAL
The northward movement in operating expenses is hurting American Airlines’ bottom line, challenging its financial stability. In the first half of 2024, total operating expenses rose 7.9% year over year to $25.5 billion. The surge in operating expenses was primarily caused by an increase in labor costs and fuel expenses. Expenses on wages and benefits rose 13.1% at the same time. As a result of the deal with pilots inked last year, labor costs are surging.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. Management expects fuel prices (including taxes) to be between $2.55 and $2.75 per gallon for the third quarter of 2024. The metric is expected to be between $2.65 per gallon and $2.75 per gallon for the full year.
We are also concerned about its high debt levels. The company’s times interest earned ratio of 1.5 at 2023-end compares unfavorably with the industry’s ratio of 4.6.
Long-Term Debt to Capitalization
Image Source: Zacks Investment Research
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
AAL’s Valuation: A Silver Lining
From a valuation perspective, AAL is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
Final Verdict
AAL’s attractive valuation is a positive. However, given the headwinds mentioned throughout the right-up, we believe that investors should not buy the stock at present. Instead, they should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank #3 (Hold) supports our thesis.
Image: Bigstock
AAL to Exit S&P 500: How Should Investors Play the Stock Now?
American Airlines (AAL - Free Report) will cease to be a member of the S&P 500 from Sept. 23. After exiting the coveted index, the airline become part of the S&P MidCap 400 index. The change is part of the S&P 500 index’s quarterly adjustment process and reflects AAL’s overall loss of market capitalization over time. AAL's market capitalization, as of Sept. 16, 2024, was $7.1 billion, down drastically from around $37 billion in December 2014.
Post Sept. 23, only three airline stocks will remain in the S&P 500 index — Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) and Southwest Airlines (LUV - Free Report) .
The erosion of market cap over time and the subsequent exit from S&P is hardly surprising, given the disappointing price performance of AAL stock. Over the past year, AAL shares have not only declined in high-double-digits but also underperformed its industry and the three airlines mentioned above.
One-Year Price Performance
American Airlines' technical indicators suggest that further downside could be ahead. The stock has been trading below the 200-day moving average, a key technical level often used by traders to gauge momentum.
200-Day Moving Average Signals Bearish Trend
Major Headwinds That Are Hurting AAL
The northward movement in operating expenses is hurting American Airlines’ bottom line, challenging its financial stability. In the first half of 2024, total operating expenses rose 7.9% year over year to $25.5 billion. The surge in operating expenses was primarily caused by an increase in labor costs and fuel expenses. Expenses on wages and benefits rose 13.1% at the same time. As a result of the deal with pilots inked last year, labor costs are surging.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. Management expects fuel prices (including taxes) to be between $2.55 and $2.75 per gallon for the third quarter of 2024. The metric is expected to be between $2.65 per gallon and $2.75 per gallon for the full year.
We are also concerned about its high debt levels. The company’s times interest earned ratio of 1.5 at 2023-end compares unfavorably with the industry’s ratio of 4.6.
Long-Term Debt to Capitalization
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
AAL’s Valuation: A Silver Lining
From a valuation perspective, AAL is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
Final Verdict
AAL’s attractive valuation is a positive. However, given the headwinds mentioned throughout the right-up, we believe that investors should not buy the stock at present. Instead, they should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank #3 (Hold) supports our thesis.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.