3 Reasons To Avoid American Airlines Stock
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well. Not in preserving capital as well.
Today I want to talk about the second part of things that few consider… Staying away from investments that you have a high probability to lose your capital with.
3 Reasons To Avoid American Airlines Stock
- It’s The Most Indebted Airline
As a percentage of its balance sheet, American Airlines (AAL) is the most indebted of the major 4 major US based airlines.
As of the most recent quarter its balance sheet is made up of 104.5% of total liabilities. And its debt to equity ratio is unavailable due to the company’s enormous debt load.
The 104.5% total liabilities as a percentage of the balance sheet… That means the company has more debt than assets. With no money left over for equity
In other words, after subtracting total liabilities from total assets there’s a negative number. This means after subtracting debt from assets that the stocks equity has a negative value.
This is rare when you see this at an operating company. But it’s horrible.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. And, to help insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
American has the opposite problem – in too much debt on an individual basis. But also, when compared to its competitors.
United Airlines (UAL) balance sheet is 82.3% total liabilities and its debt to equity ratio is 1.98.
Delta Airlines (DAL) balance sheet is 79.2% total liabilities and its debt to equity ratio is 1.3.
And Southwest Airlines (LUV) balance sheet is 66.3% in total liabilities and its debt to equity ratio is 0.4.
American is the most indebted company of the 4 major US based airline stocks. And this makes it enormously risky.
But there’s another reason to stay away from its stock.
2. It’s the Most Unprofitable Airline
In the most recent quarterly data American was unprofitable on a net income and a free cash flow basis.
These both due to increased costs related to the coronavirus. And an almost complete stoppage in their business since then.
As of the its most recent financial release on April 30th, 2020 American was losing $70 million per day.
That means from mid-March to July 8th it lost an estimated $8.3 billion due to fewer flights and higher costs related to combatting the coronavirus.
Its Net income profitability margin in the trailing twelve months (TTM) period was negative 5.8%. And its free cash flow to sales (FCF/Sales) margin in this same time was negative 4.2%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.
But these were negative in the last quarter to a large degree. Which means it lost a ton of money and is unprofitable over the last 12 months.
As a comparison United’s net income profitability margin in the TTM period is negative 1.5%. And its FCF/Sales margin was 5.5%
Delta’s net income profitability margin in the TTM period is negative 1.2%. And its FCF/Sales margin was 5.2%.
And Southwest’s net income profitability margin in the TTM period is negative 0.2%. And its FCF/Sales margin was 6.6%.
These show the industry getting hammered in the last 12 months. But that American is getting hit even worse than the others in its industry.
This is in part due also to its high debt load as well.
And there’s still one more reason to avoid American’s stock in the coming months.
3. Uncertainty Related To The Coronavirus
This all circles back to the beginning and the entire hospitality industry getting hammered by the coronavirus.
Air travel, hotels, and restaurants are still getting hammered.
This is a large problem for American and all other airlines now. And another problem is that airlines worldwide aren’t operating at anything close to full capacity.
Both due to fewer people wanting to get on planes now. And due to whatever limitations, the government puts on them to begin operating again.
Airline traffic is down 96% in April 2020 compared to April 2019 as of the most recently available airline traffic data in the US.
An estimated half of all airplanes are parked at airports and not flying.
And 1/3rd of all seats on most domestic flights remains unfilled due to social distancing restrictions.
The airline business at full capacity has razor thin margins. So thin that over the entire history of airlines the industry combined is unprofitable.
We’ll know more for sure in the coming months as airlines release more up to date financial info. But anything below full capacity means lower revenues, profits, and cash flows for this entire industry.
And with American already having the highest debt load and lowest margins this will negatively affect them more than its larger competitors.
I recommend you stay far away from this entire industry for the time being for the reasons above. But especially stay away from American.
Especially now that coronavirus cases are spiking nationwide again with no end to this pandemic in sight as of this writing.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.