What happened
Shares of American Airlines Group (NASDAQ: AAL) closed 6.4% lower on Thursday after reporting earnings — and that’s the good news. The bad news is that, at one point, American Airlines stock was down more than 10%.
American Airlines reported profits per diluted share of $0.39 for its fiscal first quarter, down 42% from the year-ago quarter. This was despite the fact that sales grew 5.9% year over year. The results beat analyst estimates, yet the stock fell nonetheless.
So what
Why? Blame it on fuel costs — and guidance. “Higher fuel prices led to a decline in year-over-year earnings,” said CEO Doug Parker, citing a 24% increase in the cost of jet fuel. Worse, American Airlines expects fuel costs to remain high all year long.
Telling investors what to expect over the rest of this year, American shaved $0.50 off the top of its guidance for full-year earnings, saying it now expects per-share profits to range between $5 and $6. Taken at the midpoint, that’s a bit below the $5.75 per share that Wall Street had been predicting.
Now what
That being said, fuel costs rise and fuel costs fall over time. It happens all the time, and fuel costs notwithstanding, Parker told investors he is still “excited about the future.” American has “the youngest fleet in the industry among our large network peer competitors.” This should mitigate maintenance costs and, because newer planes are generally more fuel efficient than older planes, should also blunt the effect of rising jet fuel costs.
My bigger worry about the stock — two worries, actually — is that acquiring its “youngest fleet in the industry” required American to take on a pretty heaping helping of debt — about $19.5 billion net of cash on hand. Additionally, American Airlines hasn’t been generating much in the way of free cash flow lately. It’s actually free cash flow negative over the past 12 months.
At a share price of just 11.4 times trailing earnings, and with analysts still forecasting long-term earnings growth in the 13% range, American Airlines stock is arguably a bargain. But until it turns free cash flow positive again, I cannot recommend the stock.
