In this article, I have evaluated prominent airlines stocks, American Airlines Group Inc. (AAL) and Air Canada (ACDVF), to determine which stock is poised for more growth this month. After thoroughly evaluating these stocks, I think ACDVF might be a superior choice for the reasons discussed in this article.
The worldwide airline sector is expected to grow in the next few years, owing to rising disposable income, rapidly growing middle class, and increased travel demand. Furthermore, the price of jet fuel is expected to stay relatively stable over the period, allowing airlines to levy surcharges and earn additional revenue from passenger and freight transport.
The global airline industry market is projected to grow at a CAGR of 25.5% until 2027.
Additionally, the airline technology integration market is poised to grow at a 10% CAGR until 2032. The market growth is attributed to technological advancements and improved passenger experience. Rapid advancements in technology, such as Al, Machine Learning (ML), and the Internet of Things (loT), are driving innovation in the airline industry.
While AAL declined 11.7% over the past six months compared to ACDVF’s 1.5% decline, AAL has also declined 29.7% over the past three months compared to ACDVF’s 11.7% decline.
Here are the reasons why I think ACDVF might perform better in the near term:
Recent Developments
On August 9, 2023, AAL announced the findings of a first-of-its-kind study on contrail avoidance, with results verified by satellite imagery, aimed at reducing aviation's environmental impact.
Contrails form when airplanes fly through layers of humidity, and they can persist as cirrus clouds for minutes or hours depending on the conditions.
Conversely, on September 25, 2023, ACDVF said it had placed a firm order with The Boeing Company for 18 Boeing 787-10 Dreamliner aircraft. Deliveries of the new aircraft are scheduled to begin in Q4 2025 with the last aircraft scheduled for delivery in Q1 2027.
They will be used to replace older, less efficient wide-body aircraft currently in the Air Canada fleet. The agreement also includes options for another 12 Boeing 787-10 aircraft, which will provide flexibility for growth to meet future customer demand.
Recent Financial Results
For the second quarter ended June 30, 2023, AAL’s operating revenues increased 4.7% year-over-year to $14.06 billion. Its operating income rose 112.7% year-over-year to $2.16 billion. Its net income came in at $1.34 billion. Also, its earnings per common share came in at $1.88.
On the contrary, during the fiscal second quarter that ended on June 30, 2023, ACDVF’s operating revenues increased 36.3% year-over-year to CAD5.43 billion ($4 billion). Its adjusted EBITDA increased 692.2% year-over-year to CAD1.22 billion ($900.14 million), while its net income came in at CAD838 million ($618.30 million), compared to a net loss of CAD386 million ($284.80 million) for the year-ago quarter.
Past And Expected Financial Performance
Over the past year, AAL’s revenue grew at a 29.9% CAGR. Analysts expect AAL’s revenue to increase by 8.1% this year and marginally in the third quarter ending September 2023. Its EPS is expected to be $2.61 this year, $0.25 in the current quarter ending September 2023, and $0.22 in the next quarter ending December 2023.
Conversely, ACDVF’s revenue has increased at a CAGR of 78.4% over the past year. Its revenue is expected to increase 27.7% this year and 14.1% in the third quarter ending September 2023. Its EPS is expected to be $2.72 this year and $1.65 in the current quarter ending September 2023, and $0.11 in the next quarter ending December 2023.
Valuation
AAL’s forward P/E GAAP multiple of 4.48 is higher than ACDVF’s 3.90. Additionally, TSM’s forward EV/Sales multiple of 0.73x is higher than ACDVF’s 0.60x.
Thus, ACDVF is more affordable.
Profitability
AAL's trailing-12-month gross profit margin of 27.90% is lower than ACDVF’s 30.30%. In addition, AAL’s trailing-12-month asset turnover ratio of 0.78x is lower than ACDVF’s 0.66x.
Thus, ACDVF is more profitable.
POWR Ratings
AAL has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, ACDVF has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AAL has a C grade for Growth which is in sync with its mixed performance in the recent quarter. On the other hand, ACDVF's A grade for Growth is in sync with robust performance.
Among the 28 stocks in the Airlines industry, AAL is ranked #13, while ACDVF is ranked #2.
Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Stability, Sentiment, and Quality. Get all AAL ratings here. Click here to view ACDVF ratings.
The Winner
Airlines are expected to keep seeing substantial revenue growth thanks to the pent-up demand for travel and a rising disposable income. Industry players such as AAL and ACDVF are well-positioned to benefit from these industry tailwinds.
However, AAL's poor profitability and elevated valuation multiples makes its competitor ACDVF the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Airlines industry here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
ACDVF shares were trading at $13.70 per share on Thursday afternoon, down $0.15 (-1.08%). Year-to-date, ACDVF has declined -4.99%, versus a 11.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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