On Friday, Evercore ISI adjusted its outlook on American Airlines (NASDAQ: NASDAQ:AAL), reducing the stock's price target to $10.00 from the previous $13.00, while retaining an In Line rating. The revision comes as American Airlines' earnings guidance for 2024 has been significantly reduced, with the EPS (earnings per share) midpoint dropping from $2.75 to $1.00, and free cash flow expectations moderating from $2 billion to $500 million.
Despite these adjustments, the airline has updated its full-year capacity guidance to an increase of 5-6%, a slight change from its previous mid-single digits forecast. The firm noted that it had anticipated a more assertive stance from American Airlines, particularly with the opportunity presented by new commercial leadership, in terms of margin commitment.
In the second quarter of 2024, American Airlines experienced a 6% year-over-year decline in unit revenue, while total unit costs rose by 1%. This was attributed to an 8% increase in capacity. Fuel costs per gallon also increased by 3%, with non-fuel costs remaining approximately flat. Consequently, the pre-tax margin for the airline stood at 7%, a decline from 13% in the same quarter of the previous year.
In light of these developments, Evercore ISI has also revised its EPS estimates for American Airlines for 2024 and 2025. The firm has lowered its forecasts to $1.04 and $1.05 respectively, from the former projections of $2.00 for 2024 and $1.82 for 2025. These adjustments reflect the firm's recalibrated expectations based on the airline's recent financial guidance and performance metrics.
In other recent news, American Airlines reported a profit of $717 million, a decline from the previous year's comparable period. TD Cowen analyst has raised concerns about the airline's discounting practices.
In addition, American Airlines was affected by a significant global technical disruption that grounded flights and affected operations in various industries. The disruption was due to a software update in CrowdStrike (NASDAQ:CRWD)'s Endpoint Detection and Response product. The outage had international repercussions, including on American Airlines' operations.
Lastly, TD Cowen has downgraded American Airlines' stock from Buy to Hold and lowered the price target to $10. This decision follows concerns over the airline's aggressive discounting strategies and potential risks to its revenue and earnings. The firm expressed skepticism about American Airlines' ability to generate free cash flow in the medium term.
These recent developments highlight the challenges and changes that American Airlines faces in the competitive aviation market.
InvestingPro Insights
As American Airlines (NASDAQ: AAL) navigates the headwinds of reduced earnings guidance and pricing challenges, InvestingPro data provides a deeper look into the company's financial health. With a market capitalization of $6.95 billion, American Airlines operates under a significant debt burden, which is a critical factor for investors to consider. This is emphasized by a P/E ratio that stands at a stark -55.09, reflecting market skepticism about the company's profitability in the near term.
Moreover, American Airlines' short-term obligations currently outweigh its liquid assets, which may raise concerns about the airline's financial flexibility. Analyst sentiment seems to echo this cautionary stance, as 5 analysts have recently revised their earnings estimates downwards for the upcoming period. Despite these challenges, analysts predict that the company will return to profitability this year, which could offer a glimmer of hope for potential investors.
InvestingPro Tips suggest that American Airlines' valuation implies a poor free cash flow yield and that the stock has experienced a significant price drop over the last three months, with a -23.63% total return. For those considering an investment in the airline sector, American Airlines' status as a prominent player in the Passenger Airlines industry cannot be overlooked, though its financials suggest careful scrutiny is warranted.
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