Friday, March 20, marks a great day in the history of American Airlines (NASDAQ: AAL). It will be the red-lettered for American Airlines as it joins the S&P 500 index. This will make the company the third U.S. airlines to enter into the S&P 500 following the footsteps of Southwest Airlines (LUV, Financial) and Delta Airlines (DAL, Financial).
The company has come a long way since its former parent, AMR Corp, came out of bankruptcy protection in 2013 and formed a partnership with U.S. Airways.
Jamie Baker, analyst at JP Morgan, had this to say about American Airlines’ success: "American has not been shy over the past year in repeatedly emphasizing its candidacy for inclusion in the S&P 500…"
The journey to here
American Airlines’ shares have grown 48% in the past 12 months. The share price rose nearly 7% to $53.69 upon announcement of its inclusion into the S&P 500. The world’s largest commercial airline’s market capitalization is now almost $37 billion.
American Airlines CEO Douglas Parker said to CNBC: "As the largest airline in the world we certainly knew we would be in the S&P 500 at some point in time, but this is earlier, I think, than most people expected. It’s really good news. It is good news for our shareholders. It’s good news for American."
Mr. Parker also commented on the airlines’ success story stating that the company had enjoyed more benefit from the plummeting oil prices than its competitors due to the airline not buying oil derivatives and hence the company’s finance was not locked into higher prices set before the fall.
Positive sentiments across the board
Mr. Parker felt that the airline's earnings will be boosted in 2015, compared to its immediate competitors. He felt that the airline would garner the benefit of not hedging on oil or locking into such higher prices. He stated, “The fuel price this year versus last year at today's prices and today's forward curves [is] about $4.5 billion lower than what we paid last year… So that certainly helps out earnings [in 2015].” He also expects the demand for air travel to remain strong in 2015.
Stock price movement
Since the announcement, over 18.56 million American Airlines’ shares have been exchanged, compared to its average trading volume of 10.01 million shares a day. The stock was valued at $52.64 rising 5% from the close of the market on Monday clearly indicating the value the announcement of joining the S&P 500 had on investor sentiments.
However, it is to be noted that American shares have struggled so far due to over-capacity concerns. A year-to-date valuation saw the American Airline stock down 6% prior to Monday’s announcement.
Goldman Sachs Group reiterated a bullish approach on U.S. airlines last week, with the airline sector trading at various attractive multiples compared to the larger market. They expect American Airlines to reach $1.63 EPS this quarter and $11.24 a share annually in 2015.
Parting thoughts
Even with such ground-breaking news, analysts have assigned a "hold" rating to the American Airlines Group. The company’s forte lies in multiple areas such as a notable return on equity, strong and robust revenue growth and amazing performance in the stock market. As a counter to these strengths, the company tends to favour debt over equity while managing its balance sheet. Let’s wait and check out how the American stock reacts after it joins the S&P 500 this Friday.
