Why American Airlines Group, Inc. Shares Will Keep Flying

Does this analyst make a good case or from is it just more noise Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Apr 7, 2014 at 9:47AM

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of American Airlines Group, Inc. (NASDAQ:AAL) gained about 1% in premarket trading Monday after Goldman Sachs initiated coverage on the airline operator with a buy rating.

So what: Along with the bullish call, analyst Tom Kim planted a price target of $46 on the stock, representing about 26% worth of upside to Friday's close. So while contrarians might be turned off by American Airlines' price spike over the past several months, Kim's call could reflect a strengthening sense on Wall Street that its turnaround potential still isn't fully baked into the valuation.

Now what: Goldman's 2014 and 2015 estimate for American Airlines is about 7% and 11.5%, respectively, above Wall Street's view. "The carrier's margins are poised to expand 2.0 ppts over 2013-16E to 12.7%, which we expect to drive multiple expansion," said Kim. "Meanwhile, earnings growth should accelerate thanks to a favorable airline cycle, which we expect to facilitate AAL's integration initiatives more than the market anticipates. Consensus upgrades should catalyze near-term share performance while margin growth drives multiple expansion, in our view." Of course, when you couple the airline industry's notoriously intense nature with the stock's red-hot run-up, American Airlines' long-term risk to reward trade-off doesn't seem as attractive.