At Cowen: American Airlines Stock Price Target Cut $15 from $17

American Airlines has a small stake in environmental solutions

Raymond James’ John Blackledge is putting the fear of God into shareholders of American Airlines (a $30 billion market cap) by slashing his 2019 stock price target by $15, to $17. In doing so, he challenges a number of assumptions about the company that the market has made.

Blackledge has two key concerns, which I make only marginally less daunting. First, he thinks the planned acquisition of a Brazilian low-cost carrier, LATAM Airlines, will dilute American’s balance sheet, and that investors are not really giving it much credit for the prospect. Second, he worries that labor costs are rising faster than they were in 2018, and hence that the company’s margin could begin to contract. I have concerns about both of those.

But his analysis of American’s balance sheet is troublesome because he’s been emphasizing American’s earnings growth when it’s really more about stock buybacks. This is a growing problem for the airline industry, which has gone from a spending dead end to a spending no-brainer. Clearly, to get this to happen, investors have to keep demanding more of it. But if they turn their attention to real earnings growth, they could see that too much cash has been spent on stock buybacks, and that a buyback-oriented company doesn’t do any better at generating value than one that doesn’t spend a lot on buybacks.

As for labor costs, that’s just a curious new approach to thinking about competition. All airlines are a little different, but all face high labor costs, and all have to be very competitive. We’ve learned that the business is cyclical, and we’ve learned that strong unions give your competitors a reason to be efficient. American is clearly not the best of those airlines, and that would explain the modest wage pressures it’s faced of late, but it’s not, in itself, an indicator of failing to compete. Blackledge’s earlier efforts to analyze labor costs are worth looking at; here’s one.

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