With a price-to-earnings ratio of 13, and a debt-heavy balance sheet featuring $32 billion more debt than cash on hand, American Airlines (NASDAQ:AAL) stock might not make the top of most value investors’ shopping lists. And yet, when it comes to airline stocks, American Airlines remains one of Morgan Stanley’s favorites.
Writing in response to the company’s just-completed investor day – its first in seven years – on Tuesday, Morgan Stanley analyst Ravi Shanker explained why, in his opinion, American Airlines stock deserves an Overweight (i.e. Buy) rating and a $20 price target, implying 35% profit potential in the stock. (To watch Shanker’s track record, click here)
Running down the revelations, Shanker observed first and foremost that American Airlines had few “headline-grabbing” surprises to announce. Management offered little insight into near-term trends, nor any “juicy new announcements around idiosyncratic revenue or cost initiatives.” What it did have to announce, though, might be even better: Longer term guidance that helped Morgan Stanley get a better grasp on what kind of earnings American Airlines might produce over the next three years.
Bad news first: Up until Tuesday, Shanker had been of the opinion that American would earn $3.76 per share this year, $4.63 per share next year, and $5.25 per share in 2026 – but no such luck. Turns out, American is probably going to miss both of the first two of those targets, and only barely beat the 2026 target. After hearing what management had to say yesterday, Shanker now sees the airline earning:
- $3.41 per share in 2024.
- $4.44 in 2025.
- And $5.27 in 2026.
And that’s okay.
Going into the investor day, you see, Morgan Stanley’s estimates were already about 30% more optimistic than most analysts on Wall Street. So even if American doesn’t earn quite as much as Shanker first assumed it would, the airline is still going to end up earning a lot more than what everyone else thought it would. As a result, Shanker says that “consensus out-year numbers need to come up meaningfully” if they are to catch up to American’s new guidance.
And presumably, this means that analyst ratings for American Airlines stock are also going to go up meaningfully – potentially giving the company’s stock price a boost.
That would make sense, after all. As Shanker points out, American Airlines stock currently sells for less than 3 times his latest estimate for 2026 earnings (and by extension, only 3.3 times 2025 earnings, and 4.3x 2024 earnings). By comparison, that’s actually cheaper than the forward P/E ratios on both United (4.6 times 2024 earnings) and Delta (6.2 times 2024 earnings) – potentially transforming American from an expensive stock into a bargain, relative to its peers.
When you consider furthermore that, assuming Shanker’s new estimates are correct, American stock is selling for this low-single-digit P/E ratios at the same time as it looks set to grow its earnings by 25% a year on average over the next three years, the stock looks even more like a buy.
Looking at the consensus breakdown, the optimists out gun the doubters. Based on 9 Buy ratings, 3 Holds, and 2 Sells, the stock has a Moderate Buy consensus rating. Given the $18.07 average price target, the shares are anticipated to be changing hands for a 22% premium a year from now. (See AAL stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
