- The document analyzes American Airlines, the largest airline in the US. It discusses the company's history, management, financials, and industry ratios. A technical analysis shows the stock remains in a long-term downtrend but may be breaking out of short and medium-term patterns. Most analysts have price targets above the current stock price on expectations that passenger revenue will turn positive next year, driving the stock higher. The recommendation is to take a long position once the stock closes above $38 for a $60 target price in 18 months.

1. American Airlines Recommendation
By: Dennis Lyrintzis

2. Top Down Analysis
•Pro Macro Factors:
• Growth in M&A activity. Great leading indicator in economic activity
• Ex: IPO of Twilio (4 billion dollar company) & Microsoft acquisition of LinkedIn
• According to Morgan Stanley they have a large influx IPOs starting in the month of
September. http://www.bloomberg.com/news/articles/2016-08-08/jpmorgan-has-
more-than-20-ipos-lined-up-in-september-myers-says
• Healthy pessimism sentiment in market help market from being overvalued
• Comeback in emerging markets 30% increase from lows (correlated with commodities)
• High chance of Clinton being elected President
•Con Macro Factors:
• Relative weakness in Europe
• Italian banking sector has a large amount of non-performing loans 20-30 billion euros
• Stagnant growth in Greece, Spain, Italy, and Portugal
• Over valuation in consumer discretionary because of low returns in bond market
• Unexpected rate hike
• Trump could be elected

3. OVERVIEW
• American Airlines is the largest airline.
• It serves 350 destinations in approximately 50 countries.

4. HISTORY
• With the consolidation of the airline industry to an oligopoly there are
now 4 airlines that have 80% of the market domestically because of
American Airlines most recent merge with US airways (2013).
American airlines is the worlds largest airline. Airline last all time high
was $55 when oil was over $100 per barrel beginning of 2015.
• Important Note: Airlines have historically traded of passenger
revenue per available seat mile (PRASM)

5. MANAGEMENT TEAM
• CEO: Doug Parker is very canny in management.
• Competitive pricing with other low cost carriers
• Aggressively putting on debt in low interest rate environment for
buy backs and having the newest and most efficient fleets.
Understands putting on debt at a 4.4% interest rate is more cost
efficient than paying the money in taxes. (AKA tax shield)
• Takes pay compensation from equity starting 2014. First CEO not
in the technology sector to take full compensation in equity.
• Deciding to not hedging fuel.

6. SWOT ANALYSIS (STRENGTHS)
• Youngest fleet in legacy industry 9.6 years (14 by
UAL & 19.6 by DAL).
• Out of legacy players (AAL, DAL, & UAL) has done
the best in PRASM
• Strong hold of Latin America region

7. SWOT ANALYSIS (WEAKNESSES)
•Financial position is a cause for concern with
Speculative grade credit (BB-).
•Losing out market share to LCCs and other
competitive players
•Weakness in business travel in Europe because of
Brexit.

8. SWOT ANALYSIS (OPPORTUNITIES)
•Potential to hike dividends to gain more income
investors
•High probability of a debt rating increase, to
investment grade, given strong revenue and profit
margins.
• Increase growth in Latin America.
•Oil staying lower for longer

9. SWOT ANALYSIS (THREATS)
•Further competition from low cost carriers
•Sudden increase or decrease in oil
•Zika virus
•Termism increases

10. FINANCIALS
• https://finance.yahoo.com/quote/AAL/financials?p=AAL

11. INDUSTRY RATIOS
• Pro:
• Highest quick ratio
to cover short-term
debt.
• Projected P/E 7.38.
• Con:
• Debt to equity ratio
= 530 debt (22.85B)
American Airlines
Southwest Airlines
Delta Airlines

12. Historical Technicals
(Airline Industry vs S&P 500)
•Airlines are
underperforming the
broader market
•Historically the S&P
500 gaps down if
they do not make
new highs or the
transportation sector
gaps up if the S&P
500 makes new
highs (which they
have)

13. TECHNICALS (long-term)
• Still in down trend
• If breaks 38.2 will gap up to about
40.
• A couple of consecutive closing
days above 37.5 will break the
long-term down trend.

14. TECHNICALS (median-term)
•Possible breakout of the
ascending triangle
pattern.
•Median-term downtrend
broken.

15. TECHNICALS (short-term)
•Nice short-term up
channel in both the
stock and RSI.
•On the daily it is
making higher highs
and higher lows.
•On the upper half of
the Bollinger band.

16. ANALYST REPORTS & FORECASTS
• Morgan Stanly have an Outperformance rating on them, with a $41 price target.
They stated, “American Airlines has favorable pricing dynamics, strengthening
revenue narrative, firm grasp on costs and continued supply discipline. The airline is
showing signs of relative improvement in revenue following two years of
underperformance.” The analyst sees the “progress of late as just the beginning of
momentum ahead."
• Imperial Capital have an in-line rating, with a $40 price target. Stating the company
will soon face challenges from Britain's decision to exit the EU, terrorism, Zika virus
fears and continuing revenue per available seat mile (RASM) pressures. Although
American has "strong" operating cash flows, it also has an "aggressive" CAPEX
program financed by low cost debt.
• Most analyst agree that we will not see industry average P/E of 12-14 until
passenger revenue per available seat mile (PRASM) improves to positive territory.

17. CONCLUTION
• Within Q1 of next year there should be positive PRASM causing a
repricing of the industry (20%). American is leveraged so that should
lead it back to all time highs.
• Conservatively, if PRASM does not improve, what is holding the stock
from falling? The company can easily go private in 3-4 years buying
back stock based on the 19B valuation based on half of what it
made last year.

18. RECOMMENDATION
• Look to get in long once it has closed above $38 on strong volume
for 2-3 days. Waiting to get long within 2-3 weeks because of oil
volatility .
• Overweight with a $60 valuation in 18 months.