Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is American Airlines Group Inc (AAL, Financial). The stock, currently priced at 11.74, recorded a gain of 3.3% in a day and a 3-month decrease of 37.15%. The stock's fair valuation is $21.02, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with American Airlines Group should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.86, and the company's revenues per share and Earnings Per Share (EPS) have been on a downward trend over the past five years, which raises a crucial question: Is American Airlines Group a hidden gem or a value trap?
What is the Altman Z-Score?
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
A Snapshot of American Airlines Group
As the world's largest airline by aircraft, capacity, and scheduled revenue passenger miles, American Airlines Group Inc (AAL, Financial) has significant market presence. Its major U.S. hubs are Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C. The company generates over 30% of U.S. airline revenue connecting Latin America with destinations in the United States. After completing a major fleet renewal, the company has the youngest fleet of U.S. legacy carriers.
American Airlines Group's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of American Airlines Group's Altman Z-score reveals American Airlines Group's financial health may be weak, suggesting possible financial distress. The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating American Airlines Group's historical data, 2021: -0.11; 2022: -0.14; 2023: -0.11, we observe a declining trend in this ratio. This downward movement indicates American Airlines Group's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Warning Signs: Declining Revenues and Earnings
A declining trend in revenues per share is a telltale indicator of a company's potential trouble. In the case of American Airlines Group, both the revenue per share (evident from the last five years' TTM data: 2019: 98.91; 2020: 76.68; 2021: 30.98; 2022: 59.35; 2023: 76.58; ) and the 5-year revenue growth rate (-10.7%) have shown signs of decline. This pattern may point to underlying challenges such as diminishing demand for American Airlines Group's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.
The Red Flag: Sluggish Earnings Growth
The company's earnings picture does not look much brighter. The 3-year EPS without NRI growth rate (-63.1%) is sluggish, and the future 3 to 5-year EPS growth estimate (66.42%) does not show a promising uptick. These indicators could suggest the company is struggling to translate sales into profits effectively, a critical element of a successful business model.
Despite its low price-to-fair-value ratio, American Airlines Group's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In American Airlines Group's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Conclusion
Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
