Why American Airlines' Beaten-Up Stock Is Soaring to New Heights

The stock has made a U-turn after a sustained drop since March. Should investors get on board?
By Devesh Kumar ,

Something strange but exciting is happening at American Airlines Group  (AAL) - Get Report .

The stock has surged in the past five days, after a sustained drop since March.

What changed suddenly for the once-beleaguered company?

A confluence of positive news made the company a growth stock winner

The company's June traffic and guidance report, the ripple effect of Qatar Airways' big investment in LATAM Airlines and the realization that all known negatives were already priced into the stock have all pushed the world's largest airline by fleet size forward. The upward trajectory looks likely to continue this year and beyond.

American Airlines Group is the holding company for American Airlines and US Airways. Encompassing American Eagle and US Airways Express, the company operates an average of nearly 6,700 flights per day.

But those who bought the stock in late 2015 know what free fall feels like.

The stock just kept on dropping until March. April was status quo, June was scary and then came July's move higher.

Shares of the company even withstood the Bastille Day attack in Nice, France, falling only about 1%, though other travel-related stocks such as Expedia, Norwegian Cruise andPriceline dropped between 2% and 3%.

A major reason for the stock's meteoric rise is its solid business performance.

For June, the company reported revenue passenger miles increased by 2.2% year over year. It also demonstrated its grip on Pacific routes, with that line yet again showing strong gains.

The company and stock's revival occurred amid news of rival United Continental expecting a key second-quarter revenue metric to rise. However, United Continental will also book $434 million in charges in the quarter, largely due to the Federal Aviation Administration's move to open Newark Liberty International Airport to extra competition.

Another peer, Delta Air Lines missed second-quarter revenue estimates. In addition, that company trimmed its capacity guidance by a full percentage point.

Excess capacity and fare pressure have created challenges for the airline sector this year. With a plethora of negatives, including the Brexit, tepid global economic growth and over-supplied markets already priced into airline stocks before this month, American Airlines Group's stock still took off.

The 14 analysts offering 12-month price forecasts for American Airlines have a median target of $44, which would represent a gain of 20%, even for investors who have missed the stock's July fireworks so far.

Qatar Airways' investment in LATAM Airlines is also a key growth driver. Although Avianca Holdings, Copa Holdings and Gol Transportes Aereos are likely to be the next targets for any player looking at the South American airline market, American Airlines Group benefited from renewed investor interest.

Another positive is that Deutsche Bank thinks that downside is limited for airline stocks.

American Airlines Group move higher is a sign of things to come, and the upside could be impressive. The stock trades at an enterprise value to earnings before interest, taxes, depreciation and amortization ratio of 4.03 times, in line with Delta Air Lines and United Continental.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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