100 Reasons to Buy American Airlines…

Is the future really this bright for the new American? Currently, of 16 analysts covering the company, 13 rate American a “buy” and three call it a “hold,” according to Bloomberg data. All this despite the fact that American shares have already gained 48 percent this year.

One analyst from Wolfe Research is so bullish on American’s future profit that he wrote the following this week in a note to clients:

Our best idea in airlines, American, is so compelling to us that we challenged ourselves to see if we could come up with 100 distinct reasons to be bullish on the stock. We did… We believe American is a very cheap stock with tremendous opportunities to improve margins and earnings over the next couple years while outperforming peers on a relative basis. American trades at the cheapest forward P/E in our coverage and our estimates are not even completely factoring in synergy guidance. Synergy guidance of $1B+ could also be too low (small percent of revenue relative to prior airline mergers) and management has already identified $400M of incremental “non-synergy” opportunities from inefficiencies on the legacy AMR side – these mostly include re-banking some of AMR’s hubs, implementing a variable schedule to AMR’s schedule, and increasing cabin density on AMR’s aircraft. Our $54 target price is based on 10x our untaxed 2015E. Not surprisingly, American Airlines is Outperform rated.

It took him about two hours, but he says he created a list soon to be published with 100 reasons to buy American. Here are some of the “preview points”:

No. 19: ”American generated 15 percent less revenue per employee vs. Delta last year. This should improve with headcount reductions.”
No. 36: “ JetBlue’s premium transcontinental product (Mint) likely to fail, in our opinion.”
No. 49: “American labor costs 5 percent-10 percent below Delta, United for the next few years.”
No. 55: “CEO has identified ‘probably 100 items’ that are new revenue opportunities.”
No. 59: “US Airways, the former red-headed stepchild at Star Alliance, now a valued partner in oneworld.”
No. 60: “If any airline moves first on an international checked bag fee, it’s probably American.”
No. 83: “Texas is the best state in which to do business in the U.S., in our opinion.”
No. 89: “Management has shown no interest in competing against Spirit —a rational decision given Spirit’s cost structure.”
No. 93: “Secretary of Transportation Anthony Foxx has a history of doing business with American as the former mayor of Charlotte, a US Airways hub.”
No. 99: “Cultural overhaul at HQ should improve feedback from mid-level employees.”

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  1. many of the reasons already exist in the old AA, so he’s just rehashing old talking points

    No. 83: “Texas is the best state in which to do business in the U.S., in our opinion.” – PMAA already HQ’ed in DFW, so it’s not a gain.

    No. 60: “If any airline moves first on an international checked bag fee, it’s probably American.” – the moment they do that, DL and UA would instantly copy. No advantage.

    No. 36: “ JetBlue’s premium transcontinental product (Mint) likely to fail, in our opinion.” – that’s just blindly dismissing the competition. The Mint product is probably the most disruptive one in the market place since they’re offering the same flat-bed product for $599 instead of $2000.

  2. Hi Adam,

    Did you actually get the full list? I couldn’t locate it without being a subscriber to Wolfe Research. I’d really like to see a copy of it.

    What is also really interesting is Item 36. They do not think JetBlue’s new premium product, Mint, which does not even begin until mid-June, will be successful. Mint will have four fully-enclosed suites on each flight, JFK-LAX and JFK-SFO.

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