AMR

[David Randolph]

AMR Corporation (AMR). The Group's principal activities are to provide scheduled passenger airline and airfreight carriers throughout the world.

AMR is a classic example of a technical breakout. Demand is stronger than supply and resistance at $11.65 is now support. The price action suggests the bulls are in control of the stock. Buy at the open with no fear at all, stopping the trade if we have a close under $11.65 (that would signal a false breakout, we must always be carefull and consider this possibility).

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[David Randolph]

Bought AMR @ $12.09

[David Randolph]

... the news is out, the stock will open gap up to the upside of an uptrending channel, I'll take a quick 5 or 6% profit out of this.

[David Randolph]

AMR

[David Randolph]

1. Introduction

I've read on a study that 40% of a stock's price movement is due to the general market trend, 30% to the sector and just 30% to the individual stock. So, we already have 70% pushing AMR higher, as both the general market and the airline sector are bullish.

On this analysis I'll check the 30% missing. If you're new to www.3stocksonfire.org and would like to receive my analysis on your mailbox, please register.

2. Profile

AMR Corporation (AMR), through its principal subsidiary, American Airlines, Inc., operates as a scheduled passenger airline. (complete profile here)

3. Technical Analysis
3.1. All History Chart



AMR has been around for a very, very long time as you know. As we see on this all history chart (well, my database only goes back to 1980), AMR is now at the same share price it was 20 years ago.

3.2. Medium Term Chart



Yesterday the stock was able to cross a significant resistance level. This shows me demand is stronger than supply.

3.3. Short Term Chart



The short term trend is bullish. Since the stock just cross a relevant resistance level, we have the opportunity to establish a low risk/high return trading plan on AMR.

4. Fundamental Analysis
4.1. Number of Shares Outstanding



The number of shares issued and outstanding has remained more or less stable over the years. Current market cap is 214,415,972*$30.58 = $6.56 B.

4.2. Liquidity



The current ratio, which is the ratio between total current assets and total current liabilities, has been below 1 forever on AMR. This means working capital is negative, but I guess this is normal for a airline. I've noticed a steep reduction in short term debt this latest quarter.

4.3. Revenues



Revenues grew over the last 4 years, to $22.67 B expected in 2006. The sales multiple is 0.29. The major airlines industry average sales multiple is exactly 0.29 too.

But earnings are a much more important driving force behind AMR share price:

4.4. Profits



After 5 years of huge losses that started with the earnings debacle in 2001, analysts now expect AMR to come back to profits in 2006 and certainly in 2007. Estimates for full year 2006 are for $1.89 EPS. The company made $0.71 so far, so the 4th quarter needs to deliver $1.18. Well, the market is saying it will even beat that number, and the market usually knows better.

$4.44 for 2007. This is a great comeback. If analysts are right on this one, the forward earnings multiple is 6.88, which is cheap.

5. General Overview

Just three years ago people thought AMR would file for bankruptcy, as the stock was trading just above $1, at $1.25. Yesterday, just 3 years later, it closed at $30.58, that is, 24 fold more. Well, I wish I had bought AMR back then, but I didn't. The question is, should I buy now?

As I said in the beginning, 40% of a stock price movement is given by the general market trend, 30% is the sector and the 30% left are connected with the intrinsic value of the stock. I already had 70% in favour of the bulls, now I believe I got the 30% left to make me a believer.

If AMR trades at 10 times forward earnings instead of 6.88 times, the stock will be at $44.4. This implies a 45% rise from current levels. I can live with that 

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[David Randolph]

Major airlines is one of my favorite sector at this point. Why? Because the general public would never think of buying an airline stock with oil prices this high, so one can get real bargains.

Most of the times, leaders will lead a sector higher, outperforming the sector itself (at least unil a speculative bubble in the sector starts).

I want to add AMR to the 3 Stocks on Fire Portfolio at the open (this stock is so liquid I don't have to bother with any effect we may have).

Here's my technical and fundamental justification for the trade:

1. Introduction

I've read on a study that 40% of a stock's price movement is due to the general market trend, 30% to the sector and just 30% to the individual stock. So, we already have 70% pushing AMR higher, as both the general market and the airline sector are bullish.

On this analysis I'll check the 30% missing.

2. Profile

AMR Corporation (AMR), through its principal subsidiary, American Airlines, Inc., operates as a scheduled passenger airline. (complete profile here)

3. Technical Analysis
3.1. All History Chart



AMR has been around for a very, very long time as you know. As we see on this all history chart (well, my database only goes back to 1980), AMR is now at the same share price it was 20 years ago.

3.2. Medium Term Chart



Yesterday the stock was able to cross a significant resistance level. This shows me demand is stronger than supply.

3.3. Short Term Chart



The short term trend is bullish. Since the stock just cross a relevant resistance level, we have the opportunity to establish a low risk/high return trading plan on AMR.

4. Fundamental Analysis
4.1. Number of Shares Outstanding



The number of shares issued and outstanding has remained more or less stable over the years. Current market cap is 214,415,972*$30.58 = $6.56 B.

4.2. Liquidity



The current ratio, which is the ratio between total current assets and total current liabilities, has been below 1 forever on AMR. This means working capital is negative, but I guess this is normal for a airline. I've noticed a steep reduction in short term debt this latest quarter.

4.3. Revenues



Revenues grew over the last 4 years, to $22.67 B expected in 2006. The sales multiple is 0.29. The major airlines industry average sales multiple is exactly 0.29 too.

But earnings are a much more important driving force behind AMR share price:

4.4. Profits



After 5 years of huge losses that started with the earnings debacle in 2001, analysts now expect AMR to come back to profits in 2006 and certainly in 2007. Estimates for full year 2006 are for $1.89 EPS. The company made $0.71 so far, so the 4th quarter needs to deliver $1.18. Well, the market is saying it will even beat that number, and the market usually knows better.

$4.44 for 2007. This is a great comeback. If analysts are right on this one, the forward earnings multiple is 6.88, which is cheap.

5. General Overview

Just three years ago people thought AMR would file for bankruptcy, as the stock was trading just above $1, at $1.25. Yesterday, just 3 years later, it closed at $30.58, that is, 24 fold more. Well, I wish I had bought AMR back then, but I didn't. The question is, should I buy now?

As I said in the beginning, 40% of a stock price movement is given by the general market trend, 30% is the sector and the 30% left are connected with the intrinsic value of the stock. I already had 70% in favour of the bulls, now I believe I got the 30% left to make me a believer.

If AMR trades at 10 times forward earnings instead of 6.88 times, the stock will be at $44.4. This implies a 45% rise from current levels. I can live with that 

[anvilring]

David, I apologize if I missed something in the post, but are you saying/implying we should buy for the portfolio, at or near that close of 30.58??


        regards, mitch

ps... great    call on NVAX and I'll ask here to save band width, will you be posting when to re-enter?? you mentioned under 4.50 i believe?

[David Randolph]

David, I apologize if I missed something in the post, but are you saying/implying we should buy for the portfolio, at or near that close of 30.58??

I said buy at the open, the open was $30.30, but I got my shares a few seconds later at $30. It's trading at $29.98 now. It may go down to support at $29.2, I don't know, I just know I need to hold AMR in the portfolio.

ps... great  Cheesy  call on NVAX and I'll ask here to save band width, will you be posting when to re-enter?? you mentioned under 4.50 i believe?

NVAX was Ramsburg's pick, you should spend just a bit more bandwith and ask him in the proper thread 

Thanks.

[David Randolph]

I believe that, because of fear of terrorism on planes and high oil prices, most people are losing one of the most important global trends going on: people and goods travel more.

Example: I never knew about the Guernsey Channel Islands, just between France and England, but a user of 3 Stocks is from there so I google it and suddenly I felt I would like to go there. I always wanted to visit New York, but now, I don't want just New York, I want San Franscisco, Miami, Boston, Atlanta, etc, just because I know people from those places and I want to meet them (you  ). Man, I also want to visit a good friend of mine, Aussietrader, who lives in Perth, Australia (and I'm in Portugal).

Now think of everybody else like me, across the world. Think of the slice of the 3 billion people of the BRIC countries that now have enough money to travel across the globe. Think of all the businesses and business trips that will be made with all these global corporations.

People will have more and more motivation to travel. Airlines are benefiting and will continue to benefit from this surge in demand.

So I tell you to forget about terrorism, forget about oil prices and focus on the big picture of the globalization trends. The next step you need to take is buy airlines.

AMR is just the biggest, but I will probably add at least one more airline to the 3 Stocks on Fire Portfolio. No doubt I'll continue holding AMR going forward.

[Leaira]

I just put in a contingency order to buy 20 contracts of the December 30 call option if AMR stock breaks above 30.90.

Leaira

[sebfr]

Great find and great analysis David. I applaud you 

[David Randolph]

I just put in a contingency order to buy 20 contracts of the December 30 call option if AMR stock breaks above 30.90.

Leaira

I hope you bought those options at the open, which was at $31.40. This news U.S. Airways makes $8 billion bid for Delta is putting the airline sector even more on fire 

They offered $8 B for a bankrupt company, and AMR, which is getting very profitable, is just a $6.76 B company !

Good luck Leaira 

[David Randolph]

Great find and great analysis David. I applaud you 

Thanks sebfr, but I didn't get any applause  Or maybe someone smite me 

Get some more of my thoughts on airlines from the Premium Service:

I believe that, because of fear of terrorism on planes and high oil prices, most people are losing one of the most important global trends going on: people and goods travel more.

Example: I never knew about the Guernsey Channel Islands, just between France and England, but a user of 3 Stocks is from there so I google it and suddenly I felt I would like to go there. I always wanted to visit New York, but now, I don't want just New York, I want San Franscisco, Miami, Boston, Atlanta, etc, just because I know people from those places and I want to meet them (you  ). Man, I also want to visit a good friend of mine, Aussietrader, who lives in Perth, Australia (and I'm in Portugal).

Now think of everybody else like me, across the world. Think of the slice of the 3 billion people of the BRIC countries that now have enough money to travel across the globe. Think of all the businesses and business trips that will be made with all these global corporations.

People will have more and more motivation to travel. Airlines are benefiting and will continue to benefit from this surge in demand.

So I tell you to forget about terrorism, forget about oil prices and focus on the big picture of the globalization trends. The next step you need to take is buy airlines.

AMR is just the biggest, but I will probably add at least one more airline to the 3 Stocks on Fire Portfolio. No doubt I'll continue holding AMR going forward.

Today we got this news: U.S. Airways makes $8 billion bid for Delta
 

Good luck sebfr !

[Leaira]

I missed the fill! 

The stock gapped up and never allowed me to get filled at my limit price of 2.40.  I don't really like to buy gaps anymore cuz they often turn around and fill the gap during the day.  I'll wait for a retracement and bounce off the 5EMA before getting in.

Leaira

[David Randolph]

I was reading the Yahoo Message Board of AMR and it's amazing how most people there are shorting this potent bullish breakout. As I said, the heard mentality is: "airlines should go down, because it isn't safe anymore to fly because of terrorists and they have huge costs related to the high oil price".

I believe they're completely missing the picture on airlines, as they don't see the surge in demand from globalization trends. But the numbers are already showing this, since 2006 is on track to be the strongest year ever in terms of revenues for AMR.

Analysts are estimating EPS of $4.44 for fiscal 07. This means the forward multiple is 7.3, and the EPS growth rate from 06 is estimated at 135% 

Then there was this news that put the entire airline sector on fire: US Airways Makes Hostile Offer for Delta

Paying $8 B for a bankrupt company. It gives you an idea of the value of the assets. AMR's current market cap is just $6.93 B (yet).

AMR is a medium/long term investment on the 3 Stocks on Fire Portfolio.