American Airlines Group: How Embracing the 120-Day Distribution Set Investors Up for Long-Term Gains

As part of its bankruptcy agreement, American Airlines Group (NASDAQ: AAL  ) had to distribute a large amount of shares to creditors and labor groups around the 120th day following the finalization of the US Airways merger. The company's stock had already survived a few smaller distributions, but the large distribution in early April but more pressure on it.

Whether due to the general market weakness or the stock distribution, the stock dropped from a high of $38 in early April to a bottom of $32. While a substantial increase in the amount of shares available to be sold by creditors and labor unions might have pressured the stock short term, most stocks eventually trade based on the fundamentals of the company and the industry.

Distribution details
Around April 10, 170 million shares were distributed to creditors and labor unions.. The company has 740 million shares outstanding at the end of the first quarter so the distribution was very material to the amount of stock available to sell in the market. The wild card was whether these groups would cash in their shares after huge gains since the merger.

American Airlines Group completed the merger of American Airlines and US Airways on Dec. 9, 2013, with the stock trading around $24 on the first day. Within only three months, the stock surged all the way to $40. The fear, at least for short-term pricing, was that creditors and labor union employees would look to immediately cash in shares. Remember, these employees have lived through the bankruptcy and years of losses, so they probably don't have an overly positive long-term outlook on the stock.

Attractive valuation
Despite the massive gain in the stock of American Airlines after completing the merger, the stock trades very favorably compared to Delta Air Lines (NYSE: DAL  ) and United Airlines (NYSE: UAL  ) . Due to rising earnings estimates, American Airlines trades as the cheapest in the group. In fact, it trades very favorably to long-suffering United Airlines, suggesting that any drop in the stock following the distribution was a massive buying opportunity. If the airline can actually produce $6 in earnings for 2015, the stock has tons of upside that won't be derailed by a share distribution.

The chart below highlights the attractive forward price-to-earnings multiple of American Airlines Group compared to the other legacy airlines.

AAL PE Ratio (Forward) Chart

AAL P/E Ratio (Forward) data by YCharts

Size matters
Looking back now, a key point about the effect of the distribution is that although the amount of American Airline shares released to creditors and employees appeared large, the amount wasn't significant to the overall size of the stock market. In addition, the distribution might have had a large valuation (approximately $5.4 billion) at the price of shares on April 10, but the reality is that a large amount of shares weren't sold, which lessened the selling pressure once the fears were removed.

In fact, the legacy airlines -- American, Delta, and United -- combined only amounted to roughly $60 billion in value in early April. Incredibly, that valuation falls short of the service that helps book the flights in The Priceline Group, Inc. With revenue of only $6.8 billion last year, the travel booking service commands a market valuation of over $60 billion.

Bottom line
With American Airlines only trading at roughly eight times forward earnings estimates, investors should've embraced the hit from the massive stock distribution that took place in early April. If anything, removing the overhead of the stock distribution unleashed the stock. For long-term investors, the stock distribution of American Airlines, and its corresponding stock decline, provided a good lesson about how keeping a keen eye on fundamentals are more important than short-term market movements.

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