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What's Going on With American Airlines Group Shares?

By Alexander MacLennan – Feb 7, 2014 at 10:17PM

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This airline was one of the best investments before, during, and after the market's turbulence.

As markets slid in late January, many investors took heavy losses to begin the new year. But one major company's stock was actually quite resilient through the turbulence. The surprising part is that the company was not a blue chip dividend payer; rather, it was American Airlines Group (AAL 2.24%)

The sell-off that was supposed to happen
American Airlines Group was formed out of the merger of US Airways and bankrupt American Airlines parent company AMR, as the two carriers sought integration savings and better pricing power. While shares of US Airways were exchanged one-to-one for shares of American Airlines Group, various stakeholders in AMR were also to receive American Airlines Group shares to cover their claims in the AMR bankruptcy.

AMR's bankruptcy was unique in that common shareholders were also allocated a piece of the new company. However, the restructuring plan still called for AMR creditors to receive a large stake in American Airlines Group. In many cases of restructurings, creditors receiving shares puts downward pressure on a stock as creditors exit by selling their shares; after all, creditors are typically debt, not equity, investors.

About a week after the official merger between US Airways and AMR, analysts from Barclays were cautious on shares of the new airline, noting the underperformance of other post-bankruptcy airlines in the months after restructuring, including Delta Air Lines (DAL 2.19%) and United Airlines, now part of United Continental Holdings (UAL 1.56%).

Industry outperformer
Despite the selling pressure from former AMR creditors, and concerns about post-bankruptcy airlines, shares of American Airlines Group have risen 44.9% since the shares began trading on Dec. 9. This increase is still favorable even when compared to the strong performance of airlines during that time frame. By contrast, Delta Air Lines rose 9.6%, United Continental Holdings gained 21.2%, and Southwest Airlines (LUV 1.76%) added 15.8%.

Driving factors
Despite the poor history of post-bankruptcy airlines (and even airlines in general), American Airlines Group has been a popular stock among analysts. Among the analysts reporting to Yahoo! Finance last month, eight of 11 rated the shares a buy or strong buy, with the remaining three giving the airline a hold. Today, eight of 13 analysts still give a buy or better opinion, with four at hold, and only one underperform. Price targets are also high with both the mean and median targets calling for double-digit percentage gains. These bullish analyst opinions have likely helped to fuel demand for shares.

Beyond the analyst opinions, American Airlines Group also looks undervalued on a forward price-to-earnings basis. With a forward P/E ratio of only 6.8, American is far cheaper than rivals, including Delta at 10.5, United Continental at 8.0, and Southwest at 13.7. For investors looking to build an airline position at a reasonable price, American Airlines Group continues to bring in buying demand.

Apparently, American Airlines Group itself agrees with analysts and the undervaluation sentiment as the airline bought back approximately 14 million shares since the merger. This move not only helps to balance out selling by former AMR creditors, but also reduces the shares outstanding.

Last but not least, the share distribution plan is also helping to balance out selling pressure from former AMR creditors. Rather than converting claims to shares in one large piece, AMR stakeholders (including creditors and holders of AMR's common stock, AAMRQ) receive their shares in four distributions over the course of 120 days. By not having as many shares available for former creditors to sell at one time, selling pressure is further reduced.

Riding out the mess
While other stocks took major hits during the recent market troubles, shares of American Airlines Group only briefly dropped before bouncing back to close Feb. 7 at a record closing high. Selling pressure from former AMR creditors has been mitigated by a number of factors including positive analyst comments, an already low valuation compared to peers, and the airline buying back shares.

During the next couple of years, American Airlines Group does face some integration risk. However, the little bits of the integration we've seen so far, and the fact that the two carriers had been planning the merger for so long, show the airline's share price has more than factored this in. As a result, I will continue to hold shares and options on American Airlines Group, and I consider the airline to be worth a further look for those bullish on this industry.

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Alexander MacLennan owns shares of AMERICAN AIRLINES GROUP INC and Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, long May 2014 $31 calls on AMERICAN AIRLINES GROUP INC., and long January 2015 $17 calls on AMERICAN AIRLINES GROUP INC. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. 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.

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Stocks Mentioned

Southwest Airlines Stock Quote
Southwest Airlines
$39.25 (1.76%) $0.68
United Airlines Holdings Stock Quote
United Airlines Holdings
$43.69 (1.56%) $0.67
Delta Air Lines Stock Quote
Delta Air Lines
$34.61 (2.19%) $0.74
American Airlines Group Stock Quote
American Airlines Group
$14.14 (2.24%) $0.31

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