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American Airlines: Has AMR stock reached rock bottom?

Posted April 10, 2008

Baltimore — (TFN): American Airlines (AMR:NYSE) canceled an additional 933 flights today to catch up on inspections and to repair questionable electrical wiring in hundreds of jets. This marks the third day of mass groundings.

The nation’s largest airline has now canceled a total of more than 2,400 flights since Tuesday, after FAA regulators implied that nearly half its airplane fleet could violate a safety regulations.

Shares of AMR stock fell more than 11% on Wednesday, recovering over 6% in morning trading on Thursday.

The fallout of the outages for AMR’s second-quarter financials should be even greater. In times of high fuel cost, airlines must cram each plane as full with passengers as they can, scrapping under-booked flights. Assuming just 100 passengers on each of the 2,400 canceled flights, over 240,000 people, each spending just $100 per flight, gross revenues would take a hit of a minimum $24 million — not counting vouchers for meals and accommodations.

With a price-earninge ration of just 5.47, AMR would now qualify as a “value stock” to those cherishing arbitrary numbers fetishes as salutary indicators of a stock’s inherent value. Indeed, given today’s impressing rebound in the face of more bad news (and medium-term fall-out), there seem to be plenty of traders who consider the recent low of $8.10 a bargain for a company that hit $34 just a year ago.

But given the outlook for U.S. consumer spending (especially on travel) and soaring gas prices, I believe the airline industry as a whole will dive-bomb into a sea of red ink by summer. (I said this much in the upcoming TFN 60-Second Buzz… which I taped before the AMR troubles hit.)

Unless you’re shorting the stock awaiting further bad news, I’d not put a dime into airline stocks just yet. No matter how cheap, you can always lose another 90% of principal…

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Posted by J. Christoph Amberger · Filed Under US Stocks and Markets 

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