Intrinsic value of American Airlines Group - AAL

Previous Close

$45.55

  Intrinsic Value

$74.99

stock screener

  Rating & Target

str. buy

+65%

  Value-price divergence*

-53%

Previous close

$45.55

 
Intrinsic value

$74.99

 
Up/down potential

+65%

 
Rating

str. buy

 
Value-price divergence*

-53%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of AAL stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 23.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -1.98
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  40,180
  40,984
  41,926
  43,004
  44,213
  45,554
  47,025
  48,626
  50,360
  52,227
  54,232
  56,376
  58,664
  61,100
  63,689
  66,437
  69,348
  72,430
  75,689
  79,133
  82,769
  86,605
  90,651
  94,916
  99,409
  104,142
  109,125
  114,369
  119,888
  125,695
  131,802
Variable operating expenses, $m
 
  34,787
  35,578
  36,481
  37,496
  38,620
  39,854
  41,198
  42,652
  44,218
  45,900
  47,289
  49,208
  51,252
  53,424
  55,728
  58,170
  60,756
  63,489
  66,378
  69,428
  72,646
  76,040
  79,617
  83,386
  87,356
  91,536
  95,935
  100,565
  105,435
  110,558
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  34,896
  34,787
  35,578
  36,481
  37,496
  38,620
  39,854
  41,198
  42,652
  44,218
  45,900
  47,289
  49,208
  51,252
  53,424
  55,728
  58,170
  60,756
  63,489
  66,378
  69,428
  72,646
  76,040
  79,617
  83,386
  87,356
  91,536
  95,935
  100,565
  105,435
  110,558
Operating income, $m
  5,284
  6,197
  6,349
  6,522
  6,717
  6,933
  7,170
  7,429
  7,708
  8,009
  8,332
  9,087
  9,456
  9,848
  10,266
  10,708
  11,178
  11,674
  12,200
  12,755
  13,341
  13,959
  14,611
  15,299
  16,023
  16,786
  17,589
  18,434
  19,324
  20,260
  21,244
EBITDA, $m
  7,102
  8,247
  8,437
  8,654
  8,897
  9,167
  9,463
  9,785
  10,134
  10,510
  10,913
  11,345
  11,805
  12,295
  12,816
  13,369
  13,955
  14,575
  15,231
  15,924
  16,656
  17,428
  18,242
  19,100
  20,004
  20,957
  21,959
  23,015
  24,125
  25,294
  26,523
Interest expense (income), $m
  867
  925
  908
  949
  996
  1,049
  1,108
  1,172
  1,242
  1,317
  1,399
  1,486
  1,580
  1,680
  1,786
  1,899
  2,019
  2,146
  2,280
  2,422
  2,572
  2,731
  2,898
  3,075
  3,261
  3,457
  3,663
  3,881
  4,110
  4,350
  4,604
Earnings before tax, $m
  4,299
  5,272
  5,440
  5,573
  5,721
  5,884
  6,063
  6,257
  6,466
  6,692
  6,933
  7,601
  7,876
  8,169
  8,480
  8,810
  9,159
  9,529
  9,920
  10,333
  10,768
  11,228
  11,713
  12,224
  12,762
  13,329
  13,925
  14,553
  15,214
  15,909
  16,640
Tax expense, $m
  1,623
  1,423
  1,469
  1,505
  1,545
  1,589
  1,637
  1,689
  1,746
  1,807
  1,872
  2,052
  2,126
  2,206
  2,290
  2,379
  2,473
  2,573
  2,678
  2,790
  2,907
  3,032
  3,162
  3,300
  3,446
  3,599
  3,760
  3,929
  4,108
  4,296
  4,493
Net income, $m
  2,676
  3,848
  3,971
  4,068
  4,176
  4,295
  4,426
  4,567
  4,720
  4,885
  5,061
  5,548
  5,749
  5,963
  6,190
  6,431
  6,686
  6,956
  7,241
  7,543
  7,861
  8,197
  8,550
  8,923
  9,316
  9,730
  10,166
  10,624
  11,106
  11,614
  12,148

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  6,359
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  51,274
  52,275
  53,477
  54,852
  56,395
  58,104
  59,980
  62,023
  64,234
  66,616
  69,173
  71,908
  74,826
  77,934
  81,236
  84,741
  88,454
  92,385
  96,542
  100,935
  105,572
  110,466
  115,626
  121,066
  126,798
  132,834
  139,190
  145,879
  152,919
  160,325
  168,114
Adjusted assets (=assets-cash), $m
  44,915
  52,275
  53,477
  54,852
  56,395
  58,104
  59,980
  62,023
  64,234
  66,616
  69,173
  71,908
  74,826
  77,934
  81,236
  84,741
  88,454
  92,385
  96,542
  100,935
  105,572
  110,466
  115,626
  121,066
  126,798
  132,834
  139,190
  145,879
  152,919
  160,325
  168,114
Revenue / Adjusted assets
  0.895
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
  0.784
Average production assets, $m
  31,546
  32,172
  32,912
  33,758
  34,708
  35,760
  36,914
  38,171
  39,532
  40,998
  42,572
  44,255
  46,051
  47,964
  49,996
  52,153
  54,438
  56,857
  59,416
  62,119
  64,973
  67,985
  71,161
  74,509
  78,036
  81,751
  85,663
  89,780
  94,112
  98,670
  103,464
Working capital, $m
  -3,548
  -4,098
  -4,193
  -4,300
  -4,421
  -4,555
  -4,702
  -4,863
  -5,036
  -5,223
  -5,423
  -5,638
  -5,866
  -6,110
  -6,369
  -6,644
  -6,935
  -7,243
  -7,569
  -7,913
  -8,277
  -8,661
  -9,065
  -9,492
  -9,941
  -10,414
  -10,912
  -11,437
  -11,989
  -12,569
  -13,180
Total debt, $m
  24,344
  23,903
  24,985
  26,222
  27,610
  29,149
  30,837
  32,676
  34,666
  36,810
  39,111
  41,572
  44,199
  46,995
  49,968
  53,121
  56,464
  60,002
  63,743
  67,696
  71,870
  76,274
  80,919
  85,815
  90,973
  96,406
  102,126
  108,146
  114,482
  121,147
  128,158
Total liabilities, $m
  47,489
  47,048
  48,130
  49,367
  50,755
  52,294
  53,982
  55,821
  57,811
  59,955
  62,256
  64,717
  67,344
  70,140
  73,113
  76,266
  79,609
  83,147
  86,888
  90,841
  95,015
  99,419
  104,064
  108,960
  114,118
  119,551
  125,271
  131,291
  137,627
  144,292
  151,303
Total equity, $m
  3,785
  5,228
  5,348
  5,485
  5,639
  5,810
  5,998
  6,202
  6,423
  6,662
  6,917
  7,191
  7,483
  7,793
  8,124
  8,474
  8,845
  9,239
  9,654
  10,093
  10,557
  11,047
  11,563
  12,107
  12,680
  13,283
  13,919
  14,588
  15,292
  16,032
  16,811
Total liabilities and equity, $m
  51,274
  52,276
  53,478
  54,852
  56,394
  58,104
  59,980
  62,023
  64,234
  66,617
  69,173
  71,908
  74,827
  77,933
  81,237
  84,740
  88,454
  92,386
  96,542
  100,934
  105,572
  110,466
  115,627
  121,067
  126,798
  132,834
  139,190
  145,879
  152,919
  160,324
  168,114
Debt-to-equity ratio
  6.432
  4.570
  4.670
  4.780
  4.900
  5.020
  5.140
  5.270
  5.400
  5.530
  5.650
  5.780
  5.910
  6.030
  6.150
  6.270
  6.380
  6.490
  6.600
  6.710
  6.810
  6.900
  7.000
  7.090
  7.170
  7.260
  7.340
  7.410
  7.490
  7.560
  7.620
Adjusted equity ratio
  -0.057
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,676
  3,848
  3,971
  4,068
  4,176
  4,295
  4,426
  4,567
  4,720
  4,885
  5,061
  5,548
  5,749
  5,963
  6,190
  6,431
  6,686
  6,956
  7,241
  7,543
  7,861
  8,197
  8,550
  8,923
  9,316
  9,730
  10,166
  10,624
  11,106
  11,614
  12,148
Depreciation, amort., depletion, $m
  1,818
  2,051
  2,088
  2,131
  2,180
  2,234
  2,292
  2,357
  2,426
  2,501
  2,581
  2,258
  2,350
  2,447
  2,551
  2,661
  2,777
  2,901
  3,031
  3,169
  3,315
  3,469
  3,631
  3,801
  3,981
  4,171
  4,371
  4,581
  4,802
  5,034
  5,279
Funds from operations, $m
  6,792
  5,899
  6,060
  6,200
  6,356
  6,529
  6,718
  6,924
  7,146
  7,386
  7,642
  7,806
  8,099
  8,410
  8,741
  9,092
  9,464
  9,857
  10,273
  10,712
  11,176
  11,665
  12,181
  12,725
  13,298
  13,901
  14,536
  15,205
  15,908
  16,648
  17,426
Change in working capital, $m
  268
  -80
  -94
  -108
  -121
  -134
  -147
  -160
  -173
  -187
  -200
  -214
  -229
  -244
  -259
  -275
  -291
  -308
  -326
  -344
  -364
  -384
  -405
  -426
  -449
  -473
  -498
  -524
  -552
  -581
  -611
Cash from operations, $m
  6,524
  5,979
  6,154
  6,307
  6,477
  6,663
  6,865
  7,084
  7,320
  7,573
  7,843
  8,021
  8,328
  8,654
  9,000
  9,367
  9,755
  10,165
  10,599
  11,056
  11,539
  12,049
  12,586
  13,151
  13,747
  14,374
  15,034
  15,729
  16,460
  17,229
  18,037
Maintenance CAPEX, $m
  0
  -1,609
  -1,641
  -1,679
  -1,722
  -1,771
  -1,824
  -1,883
  -1,948
  -2,017
  -2,092
  -2,172
  -2,258
  -2,350
  -2,447
  -2,551
  -2,661
  -2,777
  -2,901
  -3,031
  -3,169
  -3,315
  -3,469
  -3,631
  -3,801
  -3,981
  -4,171
  -4,371
  -4,581
  -4,802
  -5,034
New CAPEX, $m
  -5,731
  -627
  -740
  -846
  -950
  -1,052
  -1,155
  -1,257
  -1,361
  -1,466
  -1,573
  -1,683
  -1,796
  -1,912
  -2,032
  -2,157
  -2,286
  -2,419
  -2,558
  -2,703
  -2,854
  -3,012
  -3,176
  -3,348
  -3,527
  -3,715
  -3,912
  -4,117
  -4,332
  -4,558
  -4,794
Cash from investing activities, $m
  -5,698
  -2,236
  -2,381
  -2,525
  -2,672
  -2,823
  -2,979
  -3,140
  -3,309
  -3,483
  -3,665
  -3,855
  -4,054
  -4,262
  -4,479
  -4,708
  -4,947
  -5,196
  -5,459
  -5,734
  -6,023
  -6,327
  -6,645
  -6,979
  -7,328
  -7,696
  -8,083
  -8,488
  -8,913
  -9,360
  -9,828
Free cash flow, $m
  826
  3,743
  3,773
  3,782
  3,805
  3,840
  3,886
  3,944
  4,011
  4,089
  4,178
  4,165
  4,274
  4,392
  4,520
  4,659
  4,808
  4,968
  5,139
  5,322
  5,516
  5,722
  5,941
  6,173
  6,418
  6,678
  6,952
  7,241
  7,547
  7,869
  8,209
Issuance/(repayment) of debt, $m
  3,874
  -442
  1,082
  1,237
  1,389
  1,539
  1,688
  1,838
  1,990
  2,144
  2,301
  2,462
  2,627
  2,797
  2,972
  3,154
  3,342
  3,538
  3,741
  3,953
  4,174
  4,404
  4,645
  4,896
  5,158
  5,433
  5,720
  6,021
  6,336
  6,665
  7,011
Issuance/(repurchase) of shares, $m
  -4,500
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -670
  -442
  1,082
  1,237
  1,389
  1,539
  1,688
  1,838
  1,990
  2,144
  2,301
  2,462
  2,627
  2,797
  2,972
  3,154
  3,342
  3,538
  3,741
  3,953
  4,174
  4,404
  4,645
  4,896
  5,158
  5,433
  5,720
  6,021
  6,336
  6,665
  7,011
Total cash flow (excl. dividends), $m
  156
  3,302
  4,855
  5,019
  5,194
  5,379
  5,575
  5,782
  6,001
  6,233
  6,479
  6,627
  6,900
  7,189
  7,493
  7,813
  8,151
  8,506
  8,881
  9,275
  9,690
  10,126
  10,586
  11,069
  11,577
  12,111
  12,672
  13,262
  13,882
  14,534
  15,219
Retained Cash Flow (-), $m
  1,850
  -1,443
  -120
  -137
  -154
  -171
  -188
  -204
  -221
  -238
  -256
  -274
  -292
  -311
  -330
  -350
  -371
  -393
  -416
  -439
  -464
  -489
  -516
  -544
  -573
  -604
  -636
  -669
  -704
  -741
  -779
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  1,859
  4,734
  4,882
  5,040
  5,208
  5,387
  5,578
  5,780
  5,995
  6,223
  6,354
  6,608
  6,878
  7,162
  7,463
  7,779
  8,113
  8,465
  8,836
  9,226
  9,637
  10,070
  10,525
  11,003
  11,507
  12,036
  12,593
  13,179
  13,794
  14,440
Discount rate, %
 
  7.90
  8.30
  8.71
  9.15
  9.60
  10.08
  10.59
  11.12
  11.67
  12.26
  12.87
  13.51
  14.19
  14.90
  15.64
  16.42
  17.24
  18.11
  19.01
  19.96
  20.96
  22.01
  23.11
  24.27
  25.48
  26.75
  28.09
  29.49
  30.97
  32.52
PV of cash for distribution, $m
 
  1,723
  4,037
  3,800
  3,551
  3,293
  3,027
  2,758
  2,487
  2,220
  1,958
  1,678
  1,444
  1,226
  1,025
  844
  683
  543
  423
  324
  242
  177
  127
  88
  60
  40
  25
  16
  9
  6
  3
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

American Airlines Group Inc., through its subsidiaries, operates as a network air carrier. It provides scheduled air transportation services for passengers and cargo. As of December 31, 2016, the company operated a mainline fleet of 930 aircraft. It serves 350 destinations in approximately 50 countries, principally from its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, and Phoenix, as well as in Washington, D.C. The company was formerly known as AMR Corporation and changed its name to American Airlines Group Inc. in December 2013. American Airlines Group Inc. was founded in 1934 and is headquartered in Fort Worth, Texas.

FINANCIAL RATIOS  of  American Airlines Group (AAL)

Valuation Ratios
P/E Ratio 8.6
Price to Sales 0.6
Price to Book 6.1
Price to Tangible Book
Price to Cash Flow 3.5
Price to Free Cash Flow 29.1
Growth Rates
Sales Growth Rate -2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -6.8%
Cap. Spend. - 3 Yr. Gr. Rate 13%
Financial Strength
Quick Ratio 3
Current Ratio 0
LT Debt to Equity 594.2%
Total Debt to Equity 643.2%
Interest Coverage 6
Management Effectiveness
Return On Assets 6.5%
Ret/ On Assets - 3 Yr. Avg. 11.4%
Return On Total Capital 9.8%
Ret/ On T. Cap. - 3 Yr. Avg. 19%
Return On Equity 56.8%
Return On Equity - 3 Yr. Avg. -185.4%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 35.6%
Gross Margin - 3 Yr. Avg. 32.9%
EBITDA Margin 17.4%
EBITDA Margin - 3 Yr. Avg. 15.8%
Operating Margin 13.2%
Oper. Margin - 3 Yr. Avg. 12.7%
Pre-Tax Margin 10.7%
Pre-Tax Margin - 3 Yr. Avg. 9.8%
Net Profit Margin 6.7%
Net Profit Margin - 3 Yr. Avg. 10.7%
Effective Tax Rate 37.8%
Eff/ Tax Rate - 3 Yr. Avg. -5.6%
Payout Ratio 8.4%

AAL stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AAL stock intrinsic value calculation we used $40180 million for the last fiscal year's total revenue generated by American Airlines Group. The default revenue input number comes from 2016 income statement of American Airlines Group. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AAL stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 7.9%, whose default value for AAL is calculated based on our internal credit rating of American Airlines Group, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of American Airlines Group.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AAL stock the variable cost ratio is equal to 84.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for AAL stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.8% for American Airlines Group.

Corporate tax rate of 27% is the nominal tax rate for American Airlines Group. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AAL stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AAL are equal to 78.5%.

Life of production assets of 19.6 years is the average useful life of capital assets used in American Airlines Group operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AAL is equal to -10%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $3785 million for American Airlines Group - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 504.566 million for American Airlines Group is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of American Airlines Group at the current share price and the inputted number of shares is $23.0 billion.

Management's discussion and analysis

Together with our wholly-owned regional airline subsidiaries and third-party regional carriers operating as American Eagle, our airline operates an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries, principally from our hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. In 2016, approximately 199 million passengers boarded our mainline and regional flights.

We are committed to consistently delivering safe, reliable and convenient service to our customers in every aspect of our operation, to building the best employee relations in the industry and to providing returns for our stockholders. In January 2017, we were named the 2017 Airline of the Year by Air Transport World, which cited the integration work related to the Merger, our operational and customer service improvements and the investments we are making in our product.

Operational Highlights

During 2016, we made significant investments related to our integration and to continue to improve our product offerings and operational performance.

Integration Accomplishments

   

Integrated all mainline pilots and our mainline fleet into a single scheduling system, allowing us to schedule pilots and aircraft seamlessly across the network regardless of which pre-Merger airline they came from

   

Reached interim agreements with the TWU-IAM that allows our mainline mechanics and ramp personnel to be able to work together and be cross-utilized. Additionally, we ratified five-year JCBAs for dispatchers, flight crew training instructors, simulator pilot instructors and flight simulator engineers

   

Completed the painting of all US Airways mainline aircraft in the American livery. Repainting of former US Airways Express regional jets is expected to be finished in mid-2017

Investments in Our Product and Operations

   

Invested approximately $4.4 billion in new aircraft, including 55 new mainline and 42 new regional aircraft. As a result of our ongoing fleet renewal program, we have the youngest fleet of the major U.S. network carriers

   

Hired additional personnel and invested in new equipment and technology to support our operations. In the fourth quarter of 2016, we achieved our best monthly completion factor, on-time performance, and baggage handling performance since the Merger

   

Redesigned our AAdvantage® loyalty program to award mileage credits based on the price of tickets purchased, enabling elite members to earn even more miles based on their status level. During 2016, the AAdvantage® program was named Best Elite Program in the Americas by the Freddie Awards

   

Introduced Premium Economy, a new class of service on international flights with more legroom, wider seats, and enhanced meal service and amenity kits

   

Made several other customer experience improvements including the reintroduction of free snacks in the main cabin, the launch of complimentary in-flight entertainment and the redesign and upgrade of many Admirals Club lounges

Financial Overview

The U.S. Airline Industry

In 2016, the U.S. airline industry benefited from lower fuel prices. However, the reductions in fuel costs were offset by year-over-year declines in revenue. Both domestic and international markets were impacted by competitive capacity growth. International markets were also impacted by macroeconomic softness and foreign currency weakness.

Jet fuel prices closely follow the price of Brent crude oil. On average, the price of Brent crude oil per barrel was approximately 17% lower in 2016 as compared to 2015. The average daily spot price for Brent crude oil during 2016 was $44 per barrel as compared to an average daily spot price of $52 per barrel during 2015. On a daily basis, Brent crude oil prices fluctuated during 2016 between a high of $55 per barrel to a low of $26 per barrel, and closed the year on December 31, 2016 at $55 per barrel.

While jet fuel prices have declined year-over-year as described above, uncertainty exists regarding the economic conditions driving these declines. See Part I, Item 1A. Risk Factors – “Downturns in economic conditions could adversely affect our business”and “Our business is very dependent on the price and availability of aircraft fuel. Continued periods of high volatility in fuel costs, increased fuel prices or significant disruptions in the supply of aircraft fuel could have a significant negative impact on our operating results and liquidity.”

AAG’s 2016 Results

The selected financial data presented below is derived from AAG’s audited consolidated financial statements included in Part II, Item 8A of this report and should be read in conjunction with those financial statements and the related notes thereto.

                                 
    Year Ended
December 31,
    Increase
(Decrease)
    Percent
Increase 
(Decrease)
 
    2016     2015      
    (In millions, except percentage changes)  

Mainline and regional passenger revenues

  $ 34,579     $ 35,512     $ (933     (2.6

Cargo and other operating revenues

    5,601       5,478       123       2.3  

Total operating revenues

    40,180       40,990       (810     (2.0

Mainline and regional aircraft fuel and related taxes

    6,180       7,456       (1,276     (17.1

Salaries, wages and benefits

    10,890       9,524       1,366       14.4  

Total operating expenses

    34,896       34,786       110       0.3  

Operating income

    5,284       6,204       (920     (14.8

Pre-tax income

    4,299       4,616       (317     (6.9

Income tax provision (benefit)

    1,623       (2,994     4,617       nm  

Net income

    2,676       7,610       (4,934     (64.8
         

Pre-tax income

  $ 4,299     $ 4,616     $ (317     (6.9

Adjusted for: Total pre-tax special items (1)

    772       1,674       (902     (53.9
                                   

Pre-tax income excluding special items

  $ 5,071     $ 6,290     $ (1,219     (19.4
                                   

Results of Operations – 2016 Compared to 2015

We realized net income of $2.7 billion in 2016. This compares to $7.6 billion of net income in 2015, which included a special $3.0 billion non-cash tax benefit as we reversed the valuation allowance on our deferred tax assets, which include our federal and state NOLs. As a result of the reversal of the valuation allowance, we recorded a $1.6 billion provision for income taxes in 2016, which is substantially non-cash due to the utilization of NOLs. Accordingly, amounts reported in 2016 for income tax provision and net income are not comparable to 2015.

We realized pre-tax income of $4.3 billion and $4.6 billion in 2016 and 2015, respectively. Excluding the effects of pre-tax net special items, pre-tax income was $5.1 billion and $6.3 billion in 2016 and 2015, respectively. For reconciliation of pre-tax and net income excluding special items to their comparable measures on a GAAP basis, see Part II, Item 6. Selected Consolidated Financial Data –“Reconciliation of GAAP to Non-GAAP Financial Measures.

Our 2016 pre-tax results on both a GAAP basis and excluding pre-tax net special items were impacted by a decline in revenues due to lower yields. Salaries, wages and benefits costs were higher in 2016, driven by our new labor contracts and the addition of an employee profit sharing program; however, these increases were substantially offset by a year-over-year decline in fuel costs.

Total operating revenues in 2016 decreased $810 million, or 2.0%, from 2015 driven by lower passenger revenues offset in part by higher other revenue. Our mainline and regional TRASM was 14.70 cents in 2016, a 3.7% decrease as compared to 15.25 cents in 2015.

Total passenger revenues declined $933 million, or 2.6%, in 2016 from 2015 driven by a 2.8% decrease in yield due to competitive capacity growth, macroeconomic softness outside of the United States and foreign currency weakness.

Cargo revenue decreased $60 million, or 7.9%, in 2016 from 2015 driven primarily by a decrease in domestic and international freight yields.

Other revenue primarily includes revenue associated with our loyalty program, baggage fees, ticketing change fees, airport clubs and inflight services. Other revenue increased $183 million, or 3.9%, in 2016 from 2015 driven by an increase in loyalty program revenue. In 2016 and 2015, other revenues associated with our loyalty program were $2.1 billion and $1.9 billion, respectively, of which $1.9 billion and $1.7 billion, respectively, related to the marketing component of mileage sales and other marketing related payments. This year-over-year increase was due to our new co-branded credit card agreements which became effective in the third quarter of 2016. See Note 1(i) to AAG’s Consolidated Financial Statements in Part II, Item 8A for additional information on the loyalty program.

Total operating expenses were $34.9 billion in 2016, an increase of $110 million, or 0.3%, from 2015. The increase in operating expenses was due to higher salaries, wages and benefits driven by new labor contracts and the addition of an employee profit sharing program; however, these costs were substantially offset by a year-over-year decline in fuel costs. See detailed explanations below relating to changes in mainline operating costs per ASM.

[Source: Form 10-K dated 2017-02-22]

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▶ Qatar Airways drops bid for stake in American Airlines   [04:34PM  American City Business Journals]
▶ Qatar Air Drops This Plan Once Called 'Puzzling And Strange'   [04:23PM  Investor's Business Daily]
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▶ [$$] Qatar Airways Won't Take a Stake in American Airlines   [01:30PM  The Wall Street Journal]
▶ American Upgraded, Regeneron Downgraded, Rockwell Collins PT Raised   [Aug-01-17 04:05PM  Investor's Business Daily]
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Stock chart of AAL Financial statements of AAL
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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