American Airlines Group Inc. (NASDAQ:AAL) and United Continental Holdings, Inc. (NYSE:UAL) are the two most active stocks in the Major Airlines industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect AAL to grow earnings at a 1.12% annual rate over the next 5 years. Comparatively, UAL is expected to grow at a 6.20% annual rate. All else equal, UAL’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. American Airlines Group Inc. (AAL) has an EBITDA margin of 7.12%, compared to an EBITDA margin of 15.72% for United Continental Holdings, Inc. (UAL). This suggests that UAL underlying business is more profitable. AAL’s ROI is 13.00% while UAL has a ROI of 14.50%. The interpretation is that UAL’s business generates a higher return on investment than AAL’s.
The value of a stock is simply the present value of its future free cash flows. AAL’s free cash flow (“FCF”) per share for the trailing twelve months was +0.32. Comparatively, UAL’s free cash flow per share was +1.53. On a percent-of-sales basis, AAL’s free cash flow was 0.39% while UAL converted 1.27% of its revenues into cash flow. This means that, for a given level of sales, UAL is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. AAL has a current ratio of 0.70 compared to 0.60 for UAL. This means that AAL can more easily cover its most immediate liabilities over the next twelve months. AAL’s debt-to-equity ratio is 6.69 versus a D/E of 1.49 for UAL. AAL is therefore the more solvent of the two companies, and has lower financial risk.
AAL trades at a forward P/E of 7.95, a P/B of 5.98, and a P/S of 0.54, compared to a forward P/E of 7.25, a P/B of 2.20, and a P/S of 0.52 for UAL. AAL is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AAL is currently priced at a -25.08% to its one-year price target of $60.40. Comparatively, UAL is -30.66% relative to its price target of $91.38. This suggests that UAL is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for AAL and 2.20 for UAL, which implies that analysts are more bullish on the outlook for AAL.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. AAL has a beta of 1.04 and UAL’s beta is 1.08. AAL’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. AAL has a short ratio of 6.38 compared to a short interest of 3.36 for UAL. This implies that the market is currently less bearish on the outlook for UAL.
United Continental Holdings, Inc. (NYSE:UAL) beats American Airlines Group Inc. (NASDAQ:AAL) on a total of 12 of the 14 factors compared between the two stocks. UAL higher liquidity, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, UAL is the cheaper of the two stocks on an earnings, book value and sales basis, UAL is more undervalued relative to its price target. Finally, UAL has better sentiment signals based on short interest.