AMR: Potential High Flier

06/13/2003 12:00 am EST


George Gilder

Founder and President, Gilder Publishing, LLC

George Gilder --under the marketing prowess of Forbes' newsletter division--will cease publishing  The Technology Market Advisor and in turn launch a new publication this month, the Whitebox Market Observer. The new service will follow the same philosophy, but expand its focus beyond technology. Meanwhile, Jamie Dlugosch --a former partner of the late and great Al Frank--has successfully made it through his first six months of publishing his new The Rational Investor . We wish Gilder and Forbes the best of luck with their new product and wish Jamie continued success.  Meanwhile, both advisors are now recommending the same stock--AMR.

"AMR Corp. (AMR NYSE) and its subsidiary, American Airlines, is the world’s number one air carrier; while being number one is usually a good thing, in the aftermath of September 11, such is not the case," notes Jamie Dlugosch. "One by one the airlines faced bankruptcy and AMR was not immune. In a three-year period, shares of AMR fell from a high of $45 per share to just over $1 per share. As bankruptcy seemed imminent, AMR rushed to its three main unions in search of concessions. At the same time, the company reduced its fleet in order to meet lesser demand. While the negotiations with the unions were contentious, concessions were finally agreed upon. In the short-term, with bankruptcy less of a threat, the airline can focus on fixing its business model in order to return to profitability. Much has been said about the demise of hub and spoke systems in favor of point-to-point travel and most certainly AMR will adapt to competitive pressures. Obtaining concessions addresses one of its biggest disadvantages and gives AMR flexibility in tweaking its business. Air travel will survive this recent turmoil and thrive when business travel returns. I would buy AMR up to $10 per share with a target of $20."

"We recommend AMR on the grounds that we figure its odds of bankruptcy in the next 24 months are no greater than one in four," says George Gilder's The Technology Market Advisor . The stock is a somewhat exaggerated version of our favorite scenario–a troubled company whose problems are sufficiently comprehensible that one can sketch out the scenario for recovery, but which has so disgusted the market that no one wants to hear about it. AMR’s profile looks remarkably like that of a telecom company. The airline posted record revenues of $17.5 billion in 1998 and an operating profit of almost $2 billion. Over the next four years, the company then spent some $13.2 billion in capital expenditures including acquiring TWA. Arguably, every penny spent on expansion made it a worse company. And while it was spending money like water, it could not stand up to the unions; personnel costs rose by 46%. So why buy this pathetic, dysfunctional, mindless growth and spending addicted basket case of a company in an industry with no barriers to entry, too much capacity, and angry customers? Why? Because we love companies with problems like this. A big, fat, 'you-can’t-miss-it-blindfolded' on a moonless night-type of problem that is highly solvable. AMR just got $1.8 billion a year in union concessions, which accounts for more than half of their real operating loss in 2002. They are shrinking the fleet. Fuel costs should come down. And the stock, even at a p/e of only five–substantially bellow its historical average–gets us to $25 a share. At an upside p/e of nine, we see $45. The downside? Potentially a total loss. But we’d still argue for the chances of a strong year, and a price of $25 or better are not worse than 50-50. We’ll take that bet."

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