American Airlines Stock Price Down 8% in July – Time to Buy AAL Stock?

The price of American Airlines stock has gone down 8% so far in August while it is also standing 28% below its 52-week high of $26 per share as the rapid spread of the Delta variant and the corresponding reintroduction of travel restrictions across the world has once again weighed on the valuation of air carriers.

Meanwhile, back in 22 July, the American commercial aviation company managed to beat analysts’ estimates for the second quarter of the year as revenues landed at $7.48 billion or 361% higher than the same period a year ago while effectively exceeding the consensus forecast of $7.34 billion for the period as compiled by Refinitiv.

Moreover, the company reported narrower-than-expected adjusted losses per share of $1.69 for the period, resulting in an improvement compared to the consensus forecast of $1.72 per share based on data from Capital IQ.

Despite these upbeat results, concerns regarding the Delta variant and the effectiveness of vaccines continue to cast a shadow on the future of the commercial aviation industry.

Could this latest weakness in American Airlines share price result in an opportunity to buy shares of one of the largest air carriers in the country at a significant discount? In the following article, I’ll take a look at the latest price action while analyzing the firm’s fundamentals to see if that might be the case.

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American Airlines Stock – Technical Analysis

The price of American Airlines stock is currently tagging an important area of support at the $18.5 level and the direction that the price action takes in the following days could possibly determine the performance of the stock for the next few weeks.

A break of this important area, which has been tagged three times now, would reinforce a bearish outlook for AAL stock. That said, yesterday was a particularly interesting session as even though the price temporarily broke below this threshold during intraday action, it settled right above it on the back of high trading volumes.

Typically, when high trading volumes accompany a bounce above a key support level it means that the level is an important one for market participants.

Moving forward, if the stock bounces sharply off this threshold, chances are that the price action may have already found a short-term floor and that could lead to a reversal in the trend for AAL stock.

At the moment, momentum indicators are favoring a bearish outlook as the MACD has crossed below the signal line on increasingly higher negative momentum readings while the Relative Strength Index (RSI) just made a lower low at 35.

Moreover, the stock just broke its 200-day moving average. This break indicates a change in the mid-term trend for the stock and could be a signal of further weakness ahead.

Based on these readings, if AAL stock bounces off the support area highlighted above chances are that the resulting uptrend will be more a short-lived technical bounce than a potentially long-lasting bullish cycle as virus concerns may continue to weigh on the firm’s outlook for a while.

American Airlines Stock – Fundamental Analysis

Revenues produced by American Airlines have been progressively recovering in the past four quarters but they remain well below their pre-pandemic levels. During the second quarter of 2021, the company reported revenues of $7.48 billion that resulted in a significant improvement compared to the $1.62 billion the American carrier had reported back in Q2 2020.

However, this top-line figure was also 37.5% lower than the number reported back in Q2 2019 as demand remains capped by the persistent presence of the virus threat.

Meanwhile, this latest summer season in the United States, which is set to end once on 31 August, seem to have been a particularly good one for carriers.

According to data from the Transportation Security Administration (TSA), passenger volumes have remained 22% below their 2019 levels during August while they were 20% lower in July. Aside from the virus situation, demand from corporate customers appears to have slid and could remain below pre-pandemic levels for a long time as corporations have continued to rely on video conferencing to reduce travel expenditures.

Based on these numbers, the outlook for American for the third quarter is not necessarily bad and may fall in line with analysts’ estimates for the period or better.

This view is reflected by analysts’ forecasts for this upcoming third quarter, as the consensus estimate for AAL’s revenue is currently standing at $9.99 billion or 33.5% higher than last quarter’s results while the company is expected to trim its adjusted losses per share to $0.64.

Despite the threat of the Delta variant, the market’s perception is that the third quarter of this year will mark a turning point for air carriers and that should support higher valuations for these companies moving forward.

Based on that assumption, once this latest drop in AAL stock finds a strong technical floor, chances are that the stock will start to go up as the valuation will progressively incorporate the firm’s upcoming recovery.

Using the firm’s forecasted 2022 adjusted earnings per share of $0.81, AAL is being valued at 23 times that year’s estimated earnings. Meanwhile, even if the firm’s earnings never return to their pre-pandemic levels, if we assume that the company will generate at some point in the next two to three years at least 75% of those bottom-line results, the P/E ratio for AAL would stand at around 6 at the moment – which is a fairly depressed multiple.

For long-term buyers, the current price seems appealing for AAL stock although it is important to note that there might be other carriers trading at an equally attractive valuation that may have more robust fundamentals than American Airlines as is the case of Southwest Airlines (LUV).

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