AMERICAN AIRLINES GROUP INC AAL
January 08, 2014 - 8:01pm EST by
ladera838
2014 2015
Price: 27.63 EPS NA $4.08
Shares Out. (in M): 756 P/E NA 6.8x
Market Cap (in $M): 20,888 P/FCF NA NA
Net Debt (in $M): 6,329 EBIT 0 0
TEV ($): 39,993 TEV/EBIT NA NA

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Description

American Airlines Group (AAL) was formed by the merger of American Airlines (AMR) and US Airways (LCC) that closed on December 10, 2013.

 

My investment thesis is that in the context of a consolidating airline industry (with stabilizing profitability), the stock of AAL is undervalued, and the causes of this undervaluation are (a) the inherent complexity of AMR’s recent emergence from bankruptcy and merger with LCC, and the lack of clean post-transaction financials; (b) concerns about the execution risks of an airline merger of this size; and (c) fears about the selling of shares by creditors of AMR in the post-emergence period.

 

Valuation:

Using analyst estimates for AAL of 2014/2015 EBITDAR of $7.1B/$8.4B (versus $7.6B/$8.5B in the last Disclosure Statement):

 

 

 

Current

Current

Current

Target

Target

($MM)

DAL

UAL

AAL

AAL

AAL

       

Low

High

EBITDAR

     

 

 

2014

 $6,356

$4,805

 $7,066

 $7,066

 $7,066

2015

 6,980

 5,895

 8,356

 8,356

 8,356

% change

10%

23%

18%

 

 

       

 

 

2014

     

 

 

EBITDAR

 6,356

 4,805

 7,066

 7,066

 7,066

EBITDA

 6,031

 3,780

 5,241

 5,241

 5,241

Rental Expense

 325

 1,025

 1,825

 1,825

 1,825

       

 

 

       

 

 

Stock Price

$29.80

$41.02

$27.63

$32.57

$41.41

 x  Shares

 850

 389

 756

 756

 756

Market Value

$25,330

 14,679

$20,888

$24,623

$31,308

       

 

 

Less:

     

 

 

Total Cash

 (5,123)

 (5,270)

 (8,934)

 (8,934)

 (8,934)

       

 

 

Plus:

     

 

 

Total Debt

 14,044

 18,981

 15,263

 15,263

 15,263

Capitalized Oper Leases (7x Rental Expense)

 2,275

 7,175

 12,775

 12,775

 12,775

       

 

 

EV

 36,526

 35,565

 39,992

 43,727

 50,412

 (incl capitalized rentals)

   

 

 

       

 

 

       

 

 

EV/2014 EBITDAR

 5.7x

 7.4x

 5.7x

 

 

EV/2015 EBITDAR

 5.2x

 6.0x

 4.8x

 5.2x

 6.0x

       

 

 

 In order to bracket price targets, I have used the 2015 EV/EBITDAR ratios of DAL and UAL to caculate the low and high end of the range.

Please note that additional upside exists from AAL exceeding the expected target of $1.05B (3% of revenue) of merger synergies, given that UAL/Continental resulted in 4%, Delta/Northwest resulted in 6% and America West/US Airways resulted in 7%.  AAL combined revenues are estimated at $43B in 2014.

 

 

Integration Execution Risks:

The integration process may be less painful than prior airline mergers for a few key reasons:  the AAL team, led by LCC’s Doug Parker, has significant experience in a previous airline integration (America West/US Airways); key labor details were resolved prior to this merger; and management has had the benefit of observing the systems transition issues related to the UAL/Continental transaction.  Finally, one of AMR’s major prior issues related to sub-optimal operating levels for its JFK hub; LLC management has proven their ability to convert US Airways (with its sub-optimal hubs) into one of the most profitable US airlines.

 

Selling of shares by creditors:

The distribution of 540 million AAL shares to former AMR creditors has been staggered over 120 days following emergence from bankruptcy.  Additionally, some creditors have sold their positions by selling short shares of AMR and LCC for some time, and so downside price pressure from creditor selling may be lower than expected going forward.

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Release of clean post-transaction financials in Q1 2014; sale of shares by AMR creditors largely completed by April 2014 (120 days after emergence from bankruptcy).
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    Description

    American Airlines Group (AAL) was formed by the merger of American Airlines (AMR) and US Airways (LCC) that closed on December 10, 2013.

     

    My investment thesis is that in the context of a consolidating airline industry (with stabilizing profitability), the stock of AAL is undervalued, and the causes of this undervaluation are (a) the inherent complexity of AMR’s recent emergence from bankruptcy and merger with LCC, and the lack of clean post-transaction financials; (b) concerns about the execution risks of an airline merger of this size; and (c) fears about the selling of shares by creditors of AMR in the post-emergence period.

     

    Valuation:

    Using analyst estimates for AAL of 2014/2015 EBITDAR of $7.1B/$8.4B (versus $7.6B/$8.5B in the last Disclosure Statement):

     

     

     

    Current

    Current

    Current

    Target

    Target

    ($MM)

    DAL

    UAL

    AAL

    AAL

    AAL

           

    Low

    High

    EBITDAR

         

     

     

    2014

     $6,356

    $4,805

     $7,066

     $7,066

     $7,066

    2015

     6,980

     5,895

     8,356

     8,356

     8,356

    % change

    10%

    23%

    18%

     

     

           

     

     

    2014

         

     

     

    EBITDAR

     6,356

     4,805

     7,066

     7,066

     7,066

    EBITDA

     6,031

     3,780

     5,241

     5,241

     5,241

    Rental Expense

     325

     1,025

     1,825

     1,825

     1,825

           

     

     

           

     

     

    Stock Price

    $29.80

    $41.02

    $27.63

    $32.57

    $41.41

     x  Shares

     850

     389

     756

     756

     756

    Market Value

    $25,330

     14,679

    $20,888

    $24,623

    $31,308

           

     

     

    Less:

         

     

     

    Total Cash

     (5,123)

     (5,270)

     (8,934)

     (8,934)

     (8,934)

           

     

     

    Plus:

         

     

     

    Total Debt

     14,044

     18,981

     15,263

     15,263

     15,263

    Capitalized Oper Leases (7x Rental Expense)

     2,275

     7,175

     12,775

     12,775

     12,775

           

     

     

    EV

     36,526

     35,565

     39,992

     43,727

     50,412

     (incl capitalized rentals)

       

     

     

           

     

     

           

     

     

    EV/2014 EBITDAR

     5.7x

     7.4x

     5.7x

     

     

    EV/2015 EBITDAR

     5.2x

     6.0x

     4.8x

     5.2x

     6.0x

           

     

     

     In order to bracket price targets, I have used the 2015 EV/EBITDAR ratios of DAL and UAL to caculate the low and high end of the range.

    Please note that additional upside exists from AAL exceeding the expected target of $1.05B (3% of revenue) of merger synergies, given that UAL/Continental resulted in 4%, Delta/Northwest resulted in 6% and America West/US Airways resulted in 7%.  AAL combined revenues are estimated at $43B in 2014.

     

     

    Integration Execution Risks:

    The integration process may be less painful than prior airline mergers for a few key reasons:  the AAL team, led by LCC’s Doug Parker, has significant experience in a previous airline integration (America West/US Airways); key labor details were resolved prior to this merger; and management has had the benefit of observing the systems transition issues related to the UAL/Continental transaction.  Finally, one of AMR’s major prior issues related to sub-optimal operating levels for its JFK hub; LLC management has proven their ability to convert US Airways (with its sub-optimal hubs) into one of the most profitable US airlines.

     

    Selling of shares by creditors:

    The distribution of 540 million AAL shares to former AMR creditors has been staggered over 120 days following emergence from bankruptcy.  Additionally, some creditors have sold their positions by selling short shares of AMR and LCC for some time, and so downside price pressure from creditor selling may be lower than expected going forward.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Release of clean post-transaction financials in Q1 2014; sale of shares by AMR creditors largely completed by April 2014 (120 days after emergence from bankruptcy).

    Messages


    SubjectWhy not just buy DAL?
    Entry01/08/2014 09:24 PM
    Membereal820
    Hi- thanks for the idea
     
    Using your numbers/multiples, why wouldn't you rather own DAL which has clean nice cash flowing story, has begun to return cash to shareholders rather than pay less than a turn cheaper for integration risk at American? Could be answer is you buy them both, just not sure if American is per se comodeling relative to the exposure you can get with the Delta story.

    SubjectRE: Why not just buy DAL?
    Entry01/08/2014 09:25 PM
    Membereal820
    Should say "compelling relative to"

    SubjectRE: RE: Why not just buy DAL?
    Entry01/09/2014 05:46 PM
    Membereal820
    Thanks -  I guess would be good to know how much more upside integration provides and how cheap it is on that 'upside case' scenario [presume there is both revenue and cost synergies] (i.e. is it just they can get to the disclosure St estimates?). Also begs question how much of integration is already baked into analyst numbers vs. them being conservative due to integration risk/lags. 
     
    Clearly today's PRASM numbers for AAL nice sign and market agreed!
     
    thanks

    SubjectRE: RE: RE: RE: Why not just buy DAL?
    Entry01/10/2014 01:06 PM
    Membereal820
    Thanks
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