American Airlines Group Inc. (NASDAQ: AAL) set for reversal?

AAL is a $24bn US based company which has delivered a robust 10.9% YoY sales growth over the past 5 years; which translated to an EPS growth of 18.2% YoY driven by lower fuel cost and better operating leverage. AAL reported positive 5.5% profit margin in FY16, driven by gross and operating margin which came in at 30.1% and 11.3% respectively. However, EPS tumbled 56.5% largely due to higher income tax provisions.

In terms of financial leverage, AAL has a slightly higher Total Debt/Equity ratio of 7.1x vs. long-term average of 6.6x; which we think has helped AAL to secure a ROE of 55.4%. Other return ratios such as ROA (4.3%) and ROI (13%) looks healthy; however expected deceleration in EPS of 2.9% YoY over the next five years vs. 18.2% CAGR in the past is likely to erode the ROE going forward.

At $49.5, AAL is trading at a trailing P/E of 12.1x. After witnessing a 56.4% surge in share price over the last one year, the stock is currently trading at a forward P/E of 9.2x at a Price to Earnings growth (PEG) ratio of 4.2x. We believe the PEG ratio is relatively on the higher side compared to the street’s estimated earnings growth. However, other valuation ratios like P/S and P/B seems to be stable at 0.6x and 7.2x respectively. Important to note that the higher P/B ratio combined with higher P/Cash is indicative of the company’s strong asset and cash position. However, P/Free Cash Flow (464.4x) looks relatively large and fails to yield any meaningful conclusion as FCF dropped significantly largely due to higher Capex and aircraft purchase deposits. AAL has an analyst recommendation of 2.5 which portrays a neutral scenario ahead.

AAL stock has delivered strong performance over the last one year (+56.4%) and month (+12.8%), barring YTD (+6.1%) which we think was moderate. If we factor in the dividend yield of 0.8%, the overall holding period return would inch further northward for the existing shareholders. Average trading volume of 6.9mn shares indicates a higher activity in the stock vs. its peer group. Additionally, volatility of 2.5% for this month (which was higher than that of week’s 2.1%) shows a surge in activity in recent times.

If we introspect into the shareholding structure, AAL has a free float of 487.4mn shares; which is 99.9% of its total outstanding shares. The company has an insider ownership of 0.9% wherein insider transaction activity has declined 5.7%, reflecting an efficient stock movement based on financial performance and business strategy. Additionally, Institutional ownership is at healthy 82.9% which reflects AAL’s brightening prospects, albeit institutional transaction has declined 1.9%. This can be substantiated by its lower Float Short (8.5%) and Short ratio (6.01x) which means the investors hope stock will create value.

In terms of other technical trading parameters, the stock has beta of 0.97 coupled with average true range of 1.23x, which clearly highlights the lower volatility associated with the stock price. If we look at the 200-day simple moving average; it is at 14.6% higher than the current market price. This implies the stock has a strong resistance at $49.6 level.

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