AMR: On fire but expect a little sale tomorrow.

AMR (American Airline) is part of the six new stocks added for 2007 ideas. At that time, I contended that oil price in 2007 will be substantially lower than the price in 2006. As airline companies would be primary beneficiaries of this trend, I recommended two airline carriers: AMR, legacy carriers with great operating leverage, coming from lower fuel price and LUV, a regional carrier with superb operational performance.

(See our 2007 ideas http://www.investorhives.com...)

I have been watching AMR when it was trading around $28 and started to take a small position. At the price of $32.32, we have initiated the stock to the core holding list on 11/09/07. The stock has been on a tear (happy for our group members) with 25% gain based on today's closing price of $40.23.

AMR is heading into much better business climate as it exits the worst industry condition that lasted 2002 through 2005. Terrorist attack and heighten security measures at the airports severely impacted the air travels. Sky rocketing oil price have decimated the profitability. Several airline companies went bankrupt and AMR almost followed the suit.

As the company survived the one of the most tough business environment, it cleaned up a great deal of operational inefficiencies, successfully completing incredible number of cost saving initiatives. Now the company is leaner than ever with better terms of its labor union. Furthermore, now the fuel price is dropping precipitously with crude falling decidedly below $55 level (now close to $50). This is creating the most exciting prospect for the increased profitability. Most of the analysts recently upgraded the stock target price for AMR based on lower price of oil. Their crude price assumption in their model is still around high $50 ($57 ~ $59). At this crude price level, EPS estimate for AMR ranges from $5 ~ $6. Although the stock had a huge run, if the fuel price stays at the level suggested by the analyst crude assumption, PE multiple is still reasonable at around 7 to 8 (airline PE multiple tends to be low, anywhere between 5 to 15 historically).

I am very bullish on AMR because I think oil price will stay even lower than what analysts are using in their revised model. I believe oil may be trading in the range of high $40 and mid $50 in 07. This may increased the EPS to anywhere between $7 to $8 range and if the same multiple is applied, the stock could trade as high as $60 level. So long term, I think AMR is a definite buy.

As for tomorrow, when the company reports the earning after the market close, I expect a little sell-off. I expect that the company may report slight loss and still provide cautious stance on the fuel price based on the volatile nature of the oil price. In addition, last month, the company indicated the traffic number for Dec may not have been strong as originally forecasted (possible due to weather related delays especially in Colorado). Also there is a possibility that the company hedged the fuel price at higher level and may not benefit from the lower crude price immediately. For these reason, I see unfavorable risk to award scenario for AMR heading into earning. As a result, I want you to take about 30 to 40% of your AMR holding off the table ahead of earning.

Long term, I remain optimistic about the company business prospect. Should there be a pullback in the share price as I see it happening, you need to step up and grab some AMR shares.


The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)

Please check out the archives for past posting on individual stocks. Also analysis is available at www.investorhives.com under FilthyRich hive. Thank you for visiting my blog.