What happened
Shares of American Airlines Group (AAL -2.18%) soared 22% higher in February, according to data provided by S&P Global Market Intelligence, as investors continue to gain confidence that the worst of the pandemic is now behind us.
So what
American and other airline stocks had a difficult time in 2020. The pandemic brought global travel to a halt and caused airlines to burn through billions in cash as revenue dried up.
The industry survived the worst of the crisis, thanks to both government assistance and private fundraising efforts, and investors are growing increasingly optimistic that better days are ahead. American shares rallied in February on continued good news about COVID-19 vaccines and growing hope that leisure travelers will return in time for the summer travel season.
Image source: American Airlines.
American came into the crisis more vulnerable than most due to its industry-high debt level, and through much of 2020 was seen by some as a bankruptcy risk. The stock fell further than most during the bad times, and now has more recovery potential as conditions improve.
Now what
I think the market is right in assuming the worst is over and conditions for airlines should improve in the months to come. Still, there is some risk that investors are getting ahead of themselves when it comes to American.
AAL Enterprise Value, stock price data by YCharts
The airline's shares are still off 24% from the beginning of 2020, but the company's enterprise value (a measure of total market capitalization plus debt) is up big during that period due to all the added debt American has taken on. It's hard to argue the pandemic has made American a better investment worthy of a higher valuation.
I fear that investors are focused on the share price and not accounting for the added debt which will have to be managed for years after travelers return. Even if you are bullish on airlines, it would pay to be cautious about the stock right now.
