American is the best airline stock of the year. Wall Street is becoming increasingly bullish.

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American improves operational efficiency with just four major aircraft models. Here, an American Airbus SE A321 and a Boeing Co. 777-300ER in Los Angeles.

Patrick T. Fallon / AFP via Getty Images

American was the best airline title of the year, but it is gaining more support on Wall Street with several analysts improving the title after a relatively strong earnings report.

Daniel McKenzie of Seaport Global Securities revalued

American

(symbol: AAL) to buy odds with a target of $ 27 on Friday. While still early in the recovery, he wrote, “increased comfort” in corporate and transatlantic revenues, combined with the carrier’s plans to strengthen its balance sheet, result in “heightened conviction” in profits for 2022.

American expects a strong recovery in domestic business revenues, McKenzie noted, and its international routes provide exposure to pent-up trade demand in the UK, Europe and Brazil; American has new codeshare agreement with Brazilian national airline

GOL Linhas Aereas Inteligentes

(GOL).

American reduced labor and operating costs, in part by removing 157 aircraft from its fleet and improving operational efficiency with just four large aircraft models. The carrier has also developed strategic partnerships with

JetBlue Airways

(JBLU) and

Alaska Air

(ALK), deals that could add $ 1 billion in revenue in 2022, McKenzie estimated.

The carrier could also increase its margins by recouping its massive debt, including $ 36 billion in long-term debt and lease debt on its balance sheet. American said this week that it aims to reduce its debt by $ 15 billion over the next four years, by removing a large portion of the liabilities from its books.

McKenzie estimated that American will post earnings per share of $ 3.50 in 2023, potentially reaching $ 4 to $ 4.50 if partnerships with

JetBlue

and Alaska is unleashed. At its target of $ 27, the stock would still trade at just 6 times EPS of $ 3.50.

That said, American’s common stock is now worth just $ 14 billion, or 39% of its long-term debt. And there is no guarantee that American will not continue to dilute its shares, as it has done throughout the pandemic, as it aims to increase capacity and compete for more income in a recovery.

The US high-volume strategy could also face headwinds if the demand climate does not cooperate.

New cases of the coronavirus are skyrocketing, again with the Delta variant taking root in the United States, Europe and other regions. Australia and New Zealand have suspended their travel lanes, and the United States has yet to allow travel from Europe, Brazil, India and China for non-nationals.

Additionally, airline inventories have been tied up for months, consolidating gains at the end of 2020 as vaccinations became widespread and travel demand began to rise. The sector is down 10% in the past three months against a return of 4.5% for the S&P 500.

Still, analysts are raising earnings estimates across the industry after a series of relatively bullish earnings reports from carriers such as

Delta Airlines

(DAL),

United Airlines Holdings

(UAL) and

Southwest Airlines

(LUV).

Similarly, Cowen’s Helane Becker raised her target on the US to $ 23 while maintaining a Market Perform rating. His estimate of EPS for 2023, however, is much lower than McKenzie’s, at $ 2.55. At its target of $ 23, the stock would trade at 9 times earnings.

Bernstein analyst David Vernon also praised American’s report, writing that “if anything, the forecast is more bullish than expected.” He maintained an outperformance rating and a target of $ 28.

JP Morgan

Jamie Baker also raised estimates on the US, although it remains bearish. While he increased his target from $ 14 to $ 17 and raised his 2022 EPS target to $ 1.95 from $ 1.65, he maintained an underweight rating.

“We don’t think the company’s balance sheet strategy has been prudent, especially given the current turbulent environment, and we see better value elsewhere in our coverage,” Baker wrote.

Betting against the Americans hasn’t been the right move this year, however. The stock is up 35% this year, beating the 13.5% gain in the NYSE Arca Airline index. In fact, no other airline action came close – the next best performer was

Spirit Airlines

(SAVE) at 14.3%.

Investors seem to have viewed the American as a renovator who has managed to renovate his home enough to compete with the recovery in demand. That the stock lives up to these expectations is the bet investors are making now.


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