On Thursday, Citi updated its stance on American Airlines (NASDAQ: NASDAQ:AAL), increasing the stock's price target to $23.00, up from the previous $19.00. With the stock currently trading at $17.58, this target suggests significant upside potential. The investment firm maintained a Buy rating on the shares, indicating a positive outlook on the airline's financial performance.
According to InvestingPro data, nine analysts have recently revised their earnings estimates upward for the upcoming period, reinforcing this optimistic stance.
The revision in the price target was attributed to anticipated improvements in revenue per available seat mile (RASM) and a projected boost in earnings due to the impact of co-branded credit card agreements.
These factors have led Citi to apply a roughly 9.25x target multiple to the airline's estimated 2025 earnings per share (EPS), resulting in the elevated price target. The company's financial health score on InvestingPro is rated as "GOOD," with particularly strong momentum scores, supporting this positive outlook.
Citi's analysis points to strong cash flows stemming from co-branded credit card partnerships. These agreements involve the sale of mileage credits by airlines to credit card companies, reflecting the cardholders' purchase activities. American Airlines recognizes a portion of the revenue from these sales as other income, while the remainder contributes to an increase in the corresponding liability on the balance sheet.
Historical data has revealed a positive correlation of +0.38 between American Airlines' other income growth and earnings before tax (EBT), suggesting that the airline's financial relationship with its co-branded card partners has a tangible impact on its profitability.
This optimistic forecast by Citi may influence investor sentiment and market activity related to American Airlines' stock in the near term, as the market responds to the revised expectations for the company's financial trajectory. The stock has already demonstrated strong momentum, with a remarkable 52.87% return over the past six months. For deeper insights into AAL's valuation and growth prospects, including 12 additional ProTips and comprehensive financial analysis, consider exploring InvestingPro's detailed research report.
In other recent news, the global airline industry, including American Airlines, is set to see financial improvements due to a 20% drop in Brent crude oil prices, leading to lower fuel costs. Analysts from Bernstein and UBS have provided positive updates for American Airlines and Southwest Airlines (NYSE:LUV). Despite capacity constraints and high inflation, JetBlue has also seen significant operational and financial updates.
American Airlines has announced a new 10-year co-branded credit card deal with Citi, which is expected to enhance the airline's annual cash compensation by 10%. TD Cowen has raised its stock target for American Airlines due to this new credit card agreement and ongoing improvements in the airline industry. However, caution has been advised due to potential costs linked to a new distribution strategy and the company's high net leverage.
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