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What to Expect from American Airlines' 3Q16 Earnings

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Part 6
What to Expect from American Airlines' 3Q16 Earnings PART 6 OF 6

American Airlines’ Valuation: What’s Priced In?

Current valuation

As of October 7, 2016, American Airlines (AAL) was valued at 5.5x its forward EV/EBITDA ratio (or enterprise value to earnings before interest, tax, depreciation, and amortization). American Airlines’ valuation is higher than AAL’s average valuation post-merger (December 2013) of 4.53x. AAL’s valuation is higher than the industry median valuation of 3.6x.

American Airlines’ Valuation: What&#8217;s Priced In?

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Peer comparison

As of October 7, 2016, United Continental (UAL) is trading at 4.2x, Delta Air Lines (DAL) at 4.3x, Alaska Air Group (ALK) at 5.6x, Southwest Airlines (LUV) at 4.7x, JetBlue Airways (JBLU) at 3.8x, Spirit Airlines (SAVE) at 8.2x, and Allegiant Travel (ALGT) at 6.7x.

The market is expecting DAL to record EBITDA growth of 8.2% in the next one year. AAL’s EBITDA is expected to fall 5%, UAL’s is expected to fall 8%, ALK’s is expected to grow 6%, LUV’s is expected to grow 1%, JBLU’s is expected to grow 8%, SAVE’s is expected to grow -3%, and ALGT’s is expected to grow 1%.

Our analysis

AAL’s valuations have recovered in the recent past due to a faster-than-expected recovery in unit revenues. In the short term, valuations could be impacted by AAL’s expected future debt reduction, capacity cuts, and future margins expansion, especially as analysts are now expecting airlines’ margins to have peaked.

Investors should also keep an eye on the industry situation, as industry fundamentals also impact the company’s valuation multiple. For example, a significant and unexpected rise in fuel can be a major threat to all airlines if they cannot pass increased costs on to consumers. On the other hand, if fuel decreases further, it could further expand airlines’ margins and increase valuation multiples.

The iShares Edge MSCI Multifactor Industrials ETF (INDF) invests ~2.5% of its portfolio in American Airlines.

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