American Airlines currently trades at $11.36 per share and has shown little upside over the past six months, posting a middling return of 3%.

Is there a buying opportunity in American Airlines, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free .

We're cautious about American Airlines. Here are three reasons why there are better opportunities than AAL and a stock we'd rather own.

Why Do We Think American Airlines Will Underperform?

One of the ‘Big Four’ airlines in the US, American Airlines (NASDAQ:AAL) is a major global air carrier that serves both business and leisure travelers through its domestic and international flights.

1. Weak Growth in Revenue Passenger Miles Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like American Airlines, our preferred volume metric is revenue passenger miles). While both are important, the latter is the most critical to analyze because prices have a ceiling.

American Airlines’s revenue passenger miles came in at 60.68 billion in the latest quarter, and over the last two years, averaged 7.7% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for American Airlines, its EPS declined by 17.5% annually over the last five years while its revenue grew by 3.4%. This tells us the company became less profitable on a per-share basis as it expanded.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

American Airlines’s $37.54 billion of debt exceeds the $6.98 billion of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $5.18 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. American Airlines could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope American Airlines can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

American Airlines falls short of our quality standards. That said, the stock currently trades at 4.7× forward price-to-earnings (or $11.36 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle .

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