Imperial Capital Starts American Airlines (AAL) at In-Line
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Imperial Capital initiates coverage on American Airlines (NASDAQ: AAL) with a In-Line rating and a price target of $40.00.
Analyst Michael Derchin commented, "One of the most under-appreciated management achievements in recent years, in our view, was AAL's ability to report record net profit and pretax margins while flawlessly executing the Herculean integration of AMR and US Airways. Added to the challenges were two major headwinds: 1) the disintegration of its most profitable geographic region, Latin America, as Venezuela and Brazil economies imploded, and 2) the sunset of the Wright Amendment, which unleashed the low fares of Southwest Airlines (LUV), which in turn undermined the profitability of AAL's very profitable Dallas/Fort Worth hub.
"However, there is no rest for the weary, so to speak. AAL's execution skills will be again challenged as it attempts to navigate through new international headwinds that include Brexit, terrorism, Zika scares as well as RASM pressures domestically, in our view. We have been surprised by how domestic RASM declines have remained stubbornly persistent this summer, despite it being almost a year since LUV completed the final phase of its buildup in Dallas Love Field, which was expected to ease some of the pricing pressures. While AAL's operating cash flows have been strong, AAL has an aggressive CAPEX program financed with low cost debt, which limits free cash flow yields and results in a more financially leveraged carrier than its Big 3 peers (in addition to AAL, this includes United Airlines [UAL] and Delta Air Lines [DAL]). The good news is that AAL is expected to have the youngest fleet among the Big 3 by 2017 – 9.6 years for AAL versus 14.9 years for UAL and 16.3 years for DAL."
Shares of American Airlines closed at $36.72 yesterday.
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