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American Airlines Is Raising Equity After the ‘Reddit Rally.’ Wall Street Isn’t Impressed.

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At least one airline is taking advantage of the short-squeeze mania, planning to use its elevated stock price to issue more equity. 

American Airlines Group (ticker: AAL) said in a securities filing on Friday that it plans to raise $1.1 billion in new equity issuance. The carrier’s stock took off this week, gaining more than 15% as the company geared up to issue earnings on Thursday. 

American is the most heavily-shorted airline stock, with about 25% of the shares outstanding held short. It appears to have gotten a lift from a short-squeeze, a dynamic where prices rise as traders who are short (betting against a stock by borrowing and then selling shares) scramble to cover their losses by buying shares, fueling price gains. 

At recent prices around $17.40, American stock trades at its highest levels since last June. It’s up about 11% this year but remains down more than 35% over the last 52 weeks.

American has issued 68.5 million shares since last October, at an average price of $12.87. Issuing another 64 million shares at an average price of $17 would raise $1.1 billion, diluting shares outstanding by about 10%.

That American needs to raise that much capital is a sign that it is expecting a long grind back to profitability. The carrier burned through $30 million a day in the fourth quarter, totaling nearly $2.8 billion over the three-month period. That isn’t likely to improve much in the near-term. The airline said this week that it expects year-over-year sales to be down 60% to 65% in the first quarter, similar to fourth-quarter revenues. 

“Stubbornly high Covid-19 cases and more stringent travel restrictions continued to constrain demand,” the airline said in an earnings call. Indeed, travel trends may actually get a bit worse in the near-term, as countries reimpose travel bans due to new variants of the coronavirus.

Wall Street expects the company to break even in 2022 and start reporting meaningful earnings in 2023, forecast at $1.98 a share.  

Yet the stock is now trading well above analysts’ targets. Indeed, the average target on the Street is about $12 a share. Citigroup’s Stephen Trent maintained a Sell on the shares this week with a $15 target. Raymond James’ Savanthi Syth reiterated her Underperform rating, though she doesn’t establish a target. 

UBS analyst Myles Walton kept a Sell on the shares with a $10 target. He lowered his 2021 estimates for revenues and raised his forecasts for operating losses to $5.7 billion from $4.5 billion this year. 

“The Reddit rally taking over some stocks in the market found its way briefly to AAL and we’d guess if it returns, the company could find a particularly valuable window to recapitalize,” he wrote in a note Friday morning.

J.P. Morgan’s Jamie Baker withdrew his price target on Thursday, though he estimates the stock is worth less than $5 a share, based partly on a multiple of seven times 2022 earnings of $1.33 a share. 

It usually isn’t a good sign for a stock when analysts are withdrawing their price targets. Issuing more equity will help American get through another tough year, but it won’t do any favors for investors valuing the stock on traditional measures, like earnings per share. If the Reddit rally cools down, so too may the stock.

Write to Daren Fonda at [email protected]

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