On Tuesday, UBS initiated coverage on American Airlines Group Inc. (NASDAQ:AAL) with a Buy rating, setting a price target of $19.00. The firm anticipates that American Airlines will experience significant free cash flow (FCF) generation and profit acceleration over the next two to three years. This growth is expected to enhance the airline's equity value as it reduces net debt and leverages its balance sheet.
UBS's projections for American Airlines include an EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs) of approximately $8.7 billion for the year 2025. This figure surpasses market expectations, which are currently pricing in an EBITDAR of around $8 billion. Additionally, consensus estimates for free cash flow in 2024 and 2025 combined are at roughly $3.1 billion, while UBS estimates it could reach $4 billion.
The firm also forecasts a pretax margin estimate for American Airlines at 5.9% for the year 2025, which is higher than the consensus estimate of 5.3%. UBS suggests that the stock is trading at an approximately 19% free cash flow yield based on its 2024 estimates, which could provide downside support for the airline's shares.
A key short-term catalyst for American Airlines, as identified by UBS, is the upcoming renegotiation of its decade-old co-branded card program. This renegotiation is expected to significantly boost the company's high-margin loyalty income, adding another positive factor to the airline's financial outlook.
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