In this article, I have evaluated American Airlines Group Inc. (AAL) and Hong Kong-based Cathay Pacific Airways Limited (CPCAY) to determine which stock could be worth buying this week to capitalize on the industry’s growth prospects. After comparing these stocks fundamentally, I think CPCAY can generate superior returns based on the factors discussed throughout this article.
Before comparing these stocks, let’s see what’s shaping the airline industry’s prospects.
Rising disposable income, a rapidly growing middle-class population, and increased travel demand drive air travel demand. While revenue is expected to show an uptrend thanks to increasing demand, the anticipated stability of jet fuel prices should help airline carriers generate higher profits. The global airline industry is projected to grow at a CAGR of 25.5% until 2027.
Additionally, integrating different technologies has significantly changed how airlines operate and interact with customers. The airline technology integration market is poised to grow at a CAGR of 10% until 2032.
AAL declined 17.6% over the past six months compared to CPCAY’s 4.4% gain. The stock has also declined 11.9% over the past year compared to CPCAY’s 6.5% returns.
Here are the reasons why I think CPCAY might perform better in the near term:
Recent Developments
On October 30, 2023, AAL and the CR Smith Museum teamed up to introduce a new education program to inspire the next generation of aviation professionals. The multi-year Aviation Career Pathways program is designed for middle and high school students and provides access to aviation STEM education and exposure to industry career opportunities.
On September 29, 2023, CPCAY said it had purchased 32 Airbus A321-200neo aircraft from Airbus for a basic price of $4.66 billion.
Recent Financial Results
For the third quarter ended September 30, 2023, AAL’s operating revenues increased marginally year-over-year to $13.48 billion. Its non-GAAP net income, excluding net special items, decreased 45% year-over-year to $263 million. Its non-GAAP earnings per share, excluding net special items, decreased 44.9% year-over-year to $0.38.
On the contrary, CPCAY’s total revenue for the first half that ended June 30, 2023, rose 135% year-over-year to HK$43.59 billion ($5.55 billion). Its operating profit came in at HK$8.77 billion ($1.12 billion), compared to an operating loss of HK$1.25 billion ($159.67 million) for the same period.
Also, its net income came in at HK$4.27 billion ($543.88 million), compared to a net loss of HK$5 billion ($637 million).
Past and Expected Financial Performance
Over the past year, AAL’s revenue grew at a 17.04% CAGR. Analysts expect AAL’s revenue to increase by 7.8% this year and decline marginally in the fourth quarter ending December 2023. Its EPS is expected to be $2.35 this year and negative $0.28 in the next quarter (ending March 2024).
Conversely, CPCAY’s revenue has increased at a CAGR of 84.6% over the past year. Its revenue is expected to increase 27.7% this year. Its EPS is expected to be $2.72 this year.
Valuation
AAL’s forward EV/EBITDA multiple of 5.30 is higher than CPCAY’s 4.44. On the other hand, AAL’s forward EV/Sales multiple of 0.73x is lower than CPCAY’s 1.22x.
Profitability
AAL's trailing-12-month gross profit margin of 27.46% is lower than CPCAY’s 39.82%. In addition, AAL’s trailing-12-month EBIT margin of 9.21% is lower than CPCAY’s 15.03%.
Thus, CPCAY is more profitable.
POWR Ratings
AAL has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, CPCAY has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AAL has a C grade for Quality. Its trailing-12-month gross profit margin of 27.46% is 9.5% lower than the industry average of 30.35%. Its trailing-12-month EBIT margin of 9.21% is 4.9% lower than the industry average of 9.68%.
On the other hand, CPCAY has a B grade for Quality. Its trailing-12-month gross profit margin of 39.82% is 31.2% higher than the industry average of 30.35%. Its trailing-12-month EBIT margin of 15.03% is 55.2% higher than the industry average of 9.68%.
Among the 29 stocks in the Airlines industry, AAL is ranked #16, while CPCAY is ranked #2.
Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Stability, Sentiment, and Growth. Get all AAL ratings here. Click here to view CPCAY ratings.
The Winner
Airlines are expected to keep seeing substantial revenue growth thanks to the increased travel demand and rising disposable income. Industry players such as AAL and CPCAY are well-positioned to benefit from these industry tailwinds.
However, AAL's poor profitability makes CPCAY the better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the airline industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CPCAY shares were trading at $5.00 per share on Monday afternoon, up $0.05 (+1.01%). Year-to-date, CPCAY has declined -4.40%, versus a 19.94% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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