This Just In: Goldman Upgrades American Airlines Group Inc.

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
Two weeks ago, investment banker Goldman Sachs shocked the aerospace sector with an unexpected downgrade of leading airplane manufacturer Boeing. Fast forward 16 days, and Goldman's taking the opposite tack on one of Boeing's biggest customers: American Airlines (NASDAQ: AAL  ) .

Arguing that "a favorable airline cycle" and improved profit margins will lead to "multiple expansion," Goldman sees a case to be made for buying the unprofitable airline today. Looking past such numbers as American's $1.8 billion fiscal 2013 loss, and its $2.4 billion in trailing, negative free cash flow, Goldman expects AA to surprise its fellow analysts, leading to a spate of "consensus upgrades" that will lead investors back into the stock, sparking a 26% rise in share price to a new target of $46.

I disagree.

Let's go to the tape
While arguably one of the better Wall Street analysts out there today, outperforming about 85% of the investors we track, Goldman Sachs is far from a perfect stock picker. In fact, over the eight years we've tracked its recommendations, Goldman has called more stocks wrong than right, and racked up a record of only 47% accuracy on its picks.

Worse news for American Airlines shareholders, Goldman's record in Airlines stocks is actually worse than its overall average:

 

Goldman Said:

CAPS Says (out of five possible stars):

Goldman's Picks Beating (Lagging) S&P By:

Republic Airways

Outperform

**

(49 points)

GOL Linhas Aereas Inteligentes SA

Outperform

**

(39 points)

JetBlue Airways (NASDAQ: JBLU  )

First Underperform...
then Outperform

***

10 points


Counting recommendations that Goldman has made in airline stocks that ultimately went bust, and are no longer reflected on our scorecard, this banker's record for accuracy in picking airline stocks to "beat the market" stands at a lowly 37.5% -- meaning Goldman has guessed wrong about twice, for every pick it got right.

And call me a pessimist, but I think Goldman's calling it wrong again on this latest endorsement of the recently merged American Airlines.

Valuation matters
Why do I say this? Well, let's take a quick look at the numbers.

Among the big airlines remaining after America's post-9/11 airline merger frenzy, American Airlines is currently the only one reporting negative GAAP profits. Granted, emerging from bankruptcy and after a big merger, American has an incentive to make its past look as bad as possible, lumping in losses so as to make its future profits shine all the brighter. But still -- JetBlue, Southwest (NYSE: LUV  ) , United Continental (NYSE: UAL  ) -- one and all, they're all looking profitable today, while American is not. Delta (NYSE: DAL  ) in particular reported a $10.5 billion profit last year, fully eclipsing the $8.9 billion loss it suffered in the dog days of 2008. So even if we take at face value Goldman's assertion that America's results will look better in the years to come -- AA clearly has a lot of lost ground to make up, if it's to compare favorably to the competition.

Free cash flow, as already mentioned, is firmly in negative territory. And viewing the combined results from pre-merger Airways and AMR (with the exception of the strong three-year span from 2005 to 2008), it seems the merged entity has been burning cash for well over a decade. Meanwhile, the new AA emerges from its merger already carrying more than $11 billion in net debt. That's a heavier debt load than any of its major rivals, and it makes the absence of cash inflows to pay down the debt an unpropitious position to be in.

Foolish takeaway
Long story short -- and granting Goldman's contention that the story could change somewhat if post-merger American Airlines manages to cut its costs -- the numbers as they stand today look very bad for AA. With the stock up well over 100% over the past year, I suspect Goldman's once again going to find itself behind the curve on this recommendation, and is urging its clients to enter the stock just in time to lose money on it.

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Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2014, at 10:35 PM, chessmoves wrote:

    What competition?... They are the bigger guys on the block with a bright future in the not so distant horizon.. The comparisons given here lack foundation on what American is and will become as opposed to who they were, what they did or where they are from,, that is the past... one does not upgrade the past, one improves today and the future,.. If we always applied only who one was to everything, then none of us would ever become something of bigger value... In order to give a profound statements as: "I disagree." One has to have substancial evidence and foundation on such a statement.(Which is lacking here) Otherwise, it is just words put together in a negative way with no power behind them,,, and being so,,, Useless utterance. Motley should start filtering a bit better what they post, or they would have no integrity on the years to come.

  • Report this Comment On April 08, 2014, at 12:06 AM, Dagoldbaum wrote:

    Creditors ,bondholders,preferred stockholders,and employees(labor unions) are all getting paid in new common stock,including ex amr stockholders.AAL has generated over 10.5 billion dollars in cash flow,plus operating profits,and is expected to make north of USD 4.00 per share in 2014,valueing the stock at well bellow 10x earnings,taking into account todays closing price of around $36. Thats CHEAP!!!

    Add to this a very capable and competent NEW management team who so far has executed the merger greatly and EFFECTIVELY,I franklly cant understand from where all the negativity is coming from.

    In my experiency,AAL has been one of the best investments I've ever made and strongly believe that the best is yet to come in the next 24 months as the full synergies of the merger start to kick in.

    Long AAL.

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