American Airlines on the Post-Earnings Drop—Potential $5 Billion in Fuel Savings in 2015

01/28/2015 8:57 pm EST


Jim Jubak

Founder and Editor,

Shares of this airline company fell 4.97% Tuesday and on Wednesday the drop continued, and since MoneyShow's Jim Jubak thinks it’s a good stock to own to play the continued drop in oil prices, he’s raising his target price as of January 28.

Shares of American Airlines Group (AAL) fell 4.97% yesterday after the company reported earnings to $52.70. The company reported fourth quarter earnings of $1.52 a share, beating expected earnings by a penny a share. Revenue climbed 2.1% year over year to $10.16 versus the consensus of $10.18.billion.

Today, January 28, the drop continued with a 3.94% retreat to $50.62.

Much of the drop in the share price was a sell on the news reaction. Even though earnings grew by 16% from the third quarter of 2014, as you can tell from the very small spread between results and expectations, today’s results were by and large baked into the shares.

But part of the drop was the result of selling on disappointing PRASM guidance. Passenger revenue per available seat miles fell 1% compared to the fourth quarter of 2013. And the company guided to a steeper than expected 2% to 4% drop in PRASM in the first quarter of 2015. That drop, the company said, was partly a result of added capacity as it upgrades its fleet. But part of it was a drop in passenger traffic as American faced more competition in some markets.

The big news, for 2015, as it was for the last half of 2014, however, was the huge effect of the plunge in oil prices. Total operating expenses for the fourth quarter fell 4.1% from the fourth quarter of 2013 on a 17.3% drop in fuel prices. For 2015, the company is looking at an estimated $5 billion in lower costs from lower fuel prices. American finished the year with $8.1 billion in cash.

A drop of $5 billion in costs—which works out to $6.97 per outstanding share, according to Seeking Alpha—gives the company plenty of cash to use to pay down debt, to invest in new aircraft, to continue the upgrade of the airline’s ground facilities, and to return cash to shareholders. The company announced that it had completed its prior $1 billion share repurchase more than a year before schedule and would begin a $2 billion program due for completion by the end of 2016. (American Airlines did away with the last of its fuel hedges in July 2014.)

If you don’t own shares of American Airlines Group, I’d use the post-earnings drop to establish a position, and if you do own shares, I’d suggest adding to that position. This is a good stock to own to play the continued drop in oil prices for the first half of 2015, at the least. The stock is a member of my Jubak’s Picks 12-18 month portfolio. I added the shares on December 2, 2014 at $48. As of the close on January 28, the shares are up 5.5% and I’m raising my target price to $64 a share by June 2015 from my prior target of $52.70.

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