Analyst Sees Big Nosedive Coming for American Airlines Stock

The brokerage firm reset expectations for the airline sector

Managing Editor
May 20, 2019 at 12:41 PM
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This morning, Morgan Stanley weighed in on the airline sector, and its reviews weren't exactly glowing. The brokerage firm sees inconsistencies in cost approaches for "legacy" airliners, and thinks expectations should be reset. More specifically, American Airlines Group Inc (NASDAQ:AAL) saw its rating cut to "underweight" from "equal-weight," and its price target slashed to $26 from $40. The analyst in coverage anticipates downside thanks to higher labor costs and rising jet fuel prices.

In response, American Airlines stock is down 3% to trade at $30.71 today. AAL has now shed 10% in May after running up to a historically bearish 160-day trendline in late April, and in the last two days has breached its year-to-date breakeven level. However, today's pullback has found support at the $30 level, an area that acted as a floor back in March. 

The new price target from Morgan Stanley sits in territory not seen in three years. However, most analysts remain bullish on the airline stock. Of the 15 brokerages covering AAL, 11 rate it a "buy" or better, with zero "sells" on the books. Plus, the average 12-month price target of $40.78 is a 32.6% premium from last night's closing perch at $31.74.

Daily Stock Chart AAL

It's an opportune time to speculate on the security with near-term options. AAL's Schaeffer's Volatility Index (SVI) of 32% registers in just the 13th percentile of its annual range. In other words, the stock's short-term options are pricing in relatively modest volatility expectations for the shares.

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