Trading at a discount to its peers
American Airlines (AAL) is the largest airline company in the United States in terms of fleet size. The year so far has not gone well for the entire airline (IYT) industry, with almost every air carrier having registered a decline in its share price, except a few—such as United Continental (UAL). However, American Airlines stock has been the worst performer among its top peers YTD (year-to-date). American Airlines has fallen 29.4% YTD, followed by Southwest Airlines’ 19.7% fall.
This drastic fall in American Airlines stock has made its valuation the most attractive among its peers. The PE multiple is the simplest and most common valuation multiple. Based on AAL’s trailing-12-months’ worth of earnings, it has a PE multiple of 8.2x. Peers United Continental, Delta Air Lines (DAL), Southwest Airlines (LUV), and Spirit Airlines (SAVE) have trailing-12-month PE ratios of 11.3x, 10.6x, 13.6x, and 14.0x, respectively.
Given Wall Street’s next-12-month earnings expectations, American Airlines is also trading at a discount to its competitors. American Airlines’, United Continental’s, Delta Air Lines’, Southwest Airlines’, and Spirit Airlines’ ratios stand at 7.0x, 9.3x, 8.9x, 11.4x, and 11.6x, respectively.
Relying entirely on PE may not always the best way to determine a company’s performance due to the multiple’s various limitations. To mention a few, the PE multiple doesn’t focus on long-term earnings, doesn’t reflect a company’s debt, and doesn’t reflect the quality of a company’s earnings. Therefore, it’s better to examine other valuation indicators, such as the EV-to-EBITDA (enterprise value-to-EBITDA) multiple, which accommodates the limitations of the PE ratio.
The EV-to-EBITDA ratio is considered the best multiple for comparing airline stocks. At current market prices, American Airlines has an EV-to-EBITDA multiple of 6.41x, while competitors United Continental, Delta Airlines, Southwest Airlines, and Spirit Airlines have multiples of 5.98x, 5.87x, 6.79x, and 8.13x, respectively. American Airlines is trading at a discount to Southwest Airlines and Spirit Airlines, while it’s trading at a premium to United Continental and Delta Air Lines.
However, in terms of Wall Street’s next 12-month EBITDA expectations, American Airlines is trading at a discount to all of its competitors except for United Continental. American Airlines, United Continental, Delta Air Lines, Southwest Airlines, and Spirit Airlines have forward ratios of 5.27x, 5.20x, 5.42x, 6.27x, and 5.37x, respectively.