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American Airlines’ Valuation: What’s Priced In?

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Current valuation

Currently, American Airlines (AAL) is valued at 6.6x its forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio.

AAL’s current valuation is similar to its average post-merger valuation of 6.3x in December 2013. The industry’s median valuation stands at 6.4x.

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Peer comparison

American Airlines’ valuation is the second highest in the industry, along with Alaska Air Group’s (ALK) 6.6x EV-to-EBITDA ratio. Southwest Airlines (LUV) has the highest valuation of 6.7x among major airlines. Spirit Airlines (SAVE) is trading at a valuation of 6.3x. United Continental (UAL) and JetBlue Airways (JBLU) are trading at valuations of 5.8x, and Delta Air Lines (DAL) is trading at a valuation of 5.3x.

The market is expecting DAL to record EBITDA growth of 2.0% per share in 2017. AAL’s EBITDA is expected to fall 1.4%, UAL’s is expected to fall 4%, ALK’s is expected to rise 13%, LUV’s is expected to fall 1.5%, JBLU’s is expected to fall 2.7%, SAVE’s is expected to rise 11.5%, and ALGT’s is expected to rise 0.7%.

Our analysis

Until recently, American enjoyed the lowest valuation among its peers due to its extremely high leverage and low yields. Investors should remember that American Airlines has recently emerged from bankruptcy.

In the short term, AAL’s capacity expansion plans will affect its valuation. If it responds to United’s aggressive capacity growth plan, fears of overcapacity in the industry could resurface. Overcapacity can lead to margin contractions, affecting valuation multiples.

American Airlines’ ability to sustain its debt will be an important factor to watch. An unexpected rise in the price of fuel could be another detriment to airlines’ valuations. On the other hand, if fuel falls further, it could expand airlines’ margins and increase their valuation multiples.

Investors can gain exposure to American Airlines by investing in the PowerShares Dynamic Large Cap Value ETF (PWV), which invests ~1.5% of its portfolio in the stock.

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