AMR Popped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: At first glance, it doesn't make much sense. Oil prices have been plunging on fears that a new recession is brewing. That should have been good news for airlines -- cheaper oil, cheaper jet fuel. Yet at the same time as their fuel costs were dropping, airlines, too, began selling off. Today, the reverse: Oil prices are inching higher -- and airline stocks are running right along with 'em. Delta's (NYS: DAL) up 4%, United Continental (NYS: UAL) gained 7% -- and AMR's (NYS: AMR) doing best of all, closing up 11% on the day.

So what: Why all the extra enthusiasm over AMR? It may have something to do with the fact that the airline is spinning off its American Eagle regional jet subsidiary, a move AMR says will secure its "long-term success" by, among other things, allowing AMR to seek cheaper bids for feeder flights from other regional airlines.

Now what:Or it could be the simple fact that after losing more than half of its market cap over the past year, AMR was due for a bounce. I wouldn't try to ride this bounce, though, if I were you. AMR isn't currently profitable, and analysts don't see much chance that it will become profitable next year, either. It's loaded with debt, and according to news reports, it will be keeping American Eagle's debt on its books even after spinning the subsidiary off!

Long story short, AMR looks like a bargain at a valuation of just 0.05 times sales. It looks like a bargain --- but it isn't.

Disagree? Think this crazy idea of people flying through the skies in metal tubes has a future?Add AMR to your Fool Watchlist, and see whether you're right.



At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any stock named above. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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