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/$8.5B in the last Disclosure Statement):
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Current
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Current
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Current
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Target
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Target
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($MM)
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DAL
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UAL
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AAL
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AAL
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AAL
|
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|
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Low
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High
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EBITDAR
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|
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2014
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$6,356
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$4,805
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$7,066
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$7,066
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$7,066
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|
2015
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6,980
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5,895
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8,356
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8,356
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8,356
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% change
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10%
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23%
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18%
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|
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2014
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|
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EBITDAR
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6,356
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4,805
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7,066
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7,066
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7,066
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EBITDA
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6,031
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3,780
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5,241
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5,241
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5,241
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Rental Expense
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325
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1,025
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1,825
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1,825
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1,825
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Stock Price
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$29.80
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$41.02
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$27.63
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$32.57
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$41.41
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x Shares
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850
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389
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756
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756
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756
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Market Value
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$25,330
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14,679
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$20,888
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$24,623
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$31,308
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Less:
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Total Cash
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(5,123)
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(5,270)
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(8,934)
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(8,934)
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(8,934)
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Plus:
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Total Debt
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14,044
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18,981
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15,263
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15,263
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15,263
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Capitalized Oper Leases (7x Rental Expense)
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2,275
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7,175
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12,775
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12,775
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12,775
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|
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|
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EV
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36,526
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35,565
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39,992
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43,727
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50,412
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(incl capitalized rentals)
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EV/2014 EBITDAR
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5.7x
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7.4x
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5.7x
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EV/2015 EBITDAR
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5.2x
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6.0x
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4.8x
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5.2x
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6.0x
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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.
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).