This Just In: Goldman Upgrades American Airlines Group Inc.

Cautious on Boeing last month, the analyst sees a bright future for one of Boeing's key customers.

Apr 7, 2014 at 6:15PM

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



(49 points)

GOL Linhas Aereas Inteligentes SA



(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.

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him -- among other ways, by avoiding airline stocks like the plague. Through the years, Buffett has offered up investing tips like this one to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 336 out of more than 140,000 members.

The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information