IB Net Payout Yields Model

Cramer Thinks American Airlines Goes Much Higher

With the stock getting hit today, it's worth a refresher on the valuation of American Airlines (AAL). Sure the stock has jumped from $24 to $36 since the merger with U.S. Airways was competed back in December, but the new airline expects to make nearly $6 next year. With the stock trading at only 6x earnings expectations, it still trades like the old airlines that faced extreme competition and wouldn't have been this profitable in the first place. Why shouldn't a healthy industry trade at a multiple of 10x earnings, at least?

The only disagreement is that Cramer says the deal shouldn't have been approved, but I tend to disagree. The U.S. needs a healthy airline industry in order to update facilities and expand and the only way this is possible was via consolidation. The country now has 3 legacy airlines along with a very strong Southwest Airlines (LUV). Cramer might be correct about several routes lacking competition, but the discount airlines will work over the next few years to correct that. Some displacements in the short-term shouldn't alter the need for strong airlines.

Disclosure: Long AAL. Please review the disclaimer page for more details.


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