Estimating American Airlines’ earnings growth

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Margin improvement

Apart from improved operational efficiencies, American Airlines (AAL) has outperformed its peers in pre-tax margin (excluding special items) improvement in the first half of 2014 to 8.7% from 4.1% in the previous year. American’s (AAL) 4.6% margin improvement is the second highest among all its peers, after Alaska’s (ALK) 5.7%. Southwest’s margin also improved by 4.6%, Delta’s (DAL) by 4.5%, United’s (UAL) by 0.8%, and JetBlue’s (JBLU) by 0.7%.

According to American Airlines’ management, the 2Q14 net profit excluding special items of $1.5 billion was the highest quarterly profit in the history of American Airlines. 

Adjusted EPS_Reported Vs Estimates

EPS estimate

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The expected increase in PRASM (passenger revenue per available seat mile) growth, cost reduction due to lower crude oil prices, merger synergies, and share buybacks discussed so far will all translate into higher EPS (earnings per share) growth prospects. U.S. Airways’ results combined with American’s after the merger in 4Q13. Analysts estimate the EPS will more than double in one year of the merger to $1.25 from $0.59 in 4Q13. Wall Street analysts estimate American’s adjusted EPS to be $1.63 in 3Q14 and $1.25 in 4Q14, pushing up the EPS for 2014 to $5.34.

The actual EPS (adjusted) has exceeded analysts‘ estimate in the previous few quarters—refer to the graph above. The EPS growth is supported by the company’s increasing investments in new aircraft. In 2014, more than half of the estimated $2.1 billion in capital expenditure was to be spent on aircraft purchases.

You can invest in growth stocks like American Airlines through ETFs such as the SPDR S&P Transportation ETF (XTN), which holds 42.17% in airline stocks and provides exposure to a diversified portfolio.

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