After a stunning fall to $10, shares of American Airlines (NASDAQ:AAL) have since been on a tear. Note that AAL stock is now at $15. Yet despite this rally, the company still sports a miserable year-to-date loss of 50%.
The volatility is certainly understandable as it is extremely difficult to gauge the future of American Airlines. The big issue, of course, is how long the depressed levels of travel will last. The coronavirus from China is a global menace. So just in terms of foreign travel, it could easily be several months or more with little revenue generation for AAL.
Another issue is that the coronavirus may be seasonal. On Wednesday, Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, said: “I know we’ll be successful in putting this down now, but we really need to be prepared for another cycle.”
And while there are hints of progress on a coronavirus vaccine — such as from companies like AbbVie (NYSE:ABBV), Moderna (NASDAQ:MRNA), Regeneron (NASDAQ:REGN) and Gilead Sciences (NASDAQ:GILD) — the general availability of any treatment will likely take more than a year because of the clinical trials.
In other words, this year could easily see consistently depressed travel volumes. What’s more, there will likely be much consumer resistance to resume flying. A recent survey from The Harris Poll shows that 1 in 5 would wait at least four months after the curve on the coronavirus flattens before getting on a plane again.
AAL Stock Fundamentals
Among the major airline operators, American Airlines is one of the weaker firms. Note that the company went bankrupt in 2011. And as for the past three years, it has seen negative free cash flows despite a robust global economy and secular growth trends in the industry.
The balance sheet is also far from inspiring. While there is $3.8 billion in cash and short-term securities — as of the end of 2019 — the debt load is enormous. Consider that short and long-term liabilities are over $24 billion. By comparison, the market capitalization for AAL stock is only $6.2 billion.
Granted, it seems remote that the company will go bust. First of all, Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) Warren Buffett has a 10% stake. It seems reasonable that he would want to find ways to provide assistance. After all, this is what he did during the financial crisis with companies like Bank of America (NYSE:BAC).
Then there is the likely federal aid coming from the $2 trillion stimulus bill. These funds would likely be a way to shore-up the requirements to meet payrolls. However, there will be string attached, such as prohibitions on buybacks dividends.
The Bottom Line on American Airlines Stock
Analysts at Bank of America have put a $5 price target on AAL stock. Simply put, they think that the headwinds are just too powerful.
Now I do think this may be too extreme. Again, the company is likely to remain solvent. And by next year, the environment for flying should be much improved — which should mean a spike in earnings and revenues.
But in the meantime, it could be tough to see continued gains with AAL stock. If anything, the recent spike in shares has already baked in much of the good news, such as the federal stimulus. Thus, for now, it’s probably a good idea to wait and see.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.