American Airlines‘ (EEL – Free Report) Financial stability is increasingly threatened by high operating costs and low liquidity. Increased costs, including labor, fuel, and repairs and maintenance, put additional pressure on the company’s bottom line. In addition, low liquidity affects the company’s ability to meet its obligations, making it an unattractive choice for investors’ portfolios.
Let’s dive deeper.
Revised earnings estimate for Southward: The Zacks Consensus Estimate for the current quarter has seen downward revisions of 79% over the past 90 days. For the current year, the consensus mark for earnings has declined 58.5% over the same period. The unfavorable estimate revisions indicate that brokers lack confidence in the stock.
Weak Zacks Ranking: AAL currently has a Zacks Rank of 5 (Strong Sell).
Unspectacular price-performance ratio: American Airlines saw a 37.9 percent decline last year, while the industry grew 12.8 percent during that period.
Image source: Zacks Investment Research
Bearish Industry Rank: The industry that AAL belongs to currently has a Zacks Industry Rank of 231 (out of 251). Such an unfavorable rank places it in the bottom 8% of Zacks Industries. Studies show that 50% of a stock’s price movement is directly related to the performance of the industry group it belongs to.
A mediocre stock within a strong group is likely to outperform a strong stock in a weak industry, so it is essential to evaluate industry performance.
Other headwinds: The increase in operating costs is having a negative impact on American Airlines’ bottom line. This increase in operating costs is mainly due to the increase in fuel and labor costs.
In the second quarter of 2024, labor costs, consisting of salaries and benefits (which account for 30.5% of total operating costs), increased 9% year-on-year to $4 billion, fuel costs increased 12.4% to $3 billion, and maintenance, materials and repair costs increased 17.6% year-on-year.
The company lowered its full-year 2024 earnings per share forecast, citing pricing pressures and excess capacity that characterize certain markets. American Airlines management now expects adjusted earnings per share for the current year to be between 70 cents and $1.30 (the previous expectation was in the range of $2.25 to $3.25 per share).
AAL ended the second quarter of 2024 with a liquidity ratio (a measure of liquidity) of 0.60, raising liquidity concerns. A liquidity ratio of less than 1 indicates that the company does not have enough cash to meet its short-term obligations.
Stocks to be considered
Some better-rated stocks in the Zacks Transportation sector that investors should consider are CH Robinson worldwide (CHRW – Free report) and Kirby Corporation (KEX – Free report).
CH Robinson Worldwide currently has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. CHRW expects earnings growth of 27.4% for the current year.
The company has a history of impressive earnings surprises. Earnings have beaten the Zacks Consensus Estimate in three of the last four quarters and missed it once, for an average surprise of 7.3%. CHRW shares have risen 3.3% over the past year.
KEX currently has a Zacks Rank #2 (Buy) and is expected to post 40% earnings growth rate for the current year.
The company has an encouraging track record of earnings surprise, beating the Zacks Consensus Estimate in each of the trailing four quarters. The average beat is 8.7%. Kirby shares have gained 41.1% over the past year.
