American Airlines Group Inc. (NASDAQ:AAL) shares are down more than -11.68% this year and recently decreased -0.60% or -$0.17 to settle at $28.36. Iridium Communications Inc. (NASDAQ:IRDM), on the other hand, is up 22.93% year to date as of 08/06/2019. It currently trades at $22.68 and has returned -12.74% during the past week.
American Airlines Group Inc. (NASDAQ:AAL) and Iridium Communications Inc. (NASDAQ:IRDM) are the two most active stocks in the Major Airlines industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect AAL to grow earnings at a 15.49% annual rate over the next 5 years. Comparatively, IRDM is expected to grow at a 10.00% annual rate. All else equal, AAL’s higher growth rate would imply a greater potential for capital appreciation.
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 62.52% for Iridium Communications Inc. (IRDM). AAL’s ROI is 9.00% while IRDM has a ROI of 1.60%. The interpretation is that AAL’s business generates a higher return on investment than IRDM’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, AAL’s free cash flow was 0% while IRDM converted 0% of its revenues into cash flow. This means that, for a given level of sales, AAL is able to generate more free cash flow for investors.
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. AAL has a current ratio of 0.50 compared to 1.10 for IRDM. This means that IRDM can more easily cover its most immediate liabilities over the next twelve months.Valuation
AAL trades at a forward P/E of 4.81, and a P/S of 0.28, compared to a P/B of 1.78, and a P/S of 5.61 for IRDM. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. AAL is currently priced at a -29.21% to its one-year price target of 40.06. Comparatively, IRDM is -14.74% relative to its price target of 26.60. This suggests that AAL is the better investment over the next year.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. AAL has a beta of 1.68 and IRDM’s beta is 2.09. AAL’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. AAL has a short ratio of 3.29 compared to a short interest of 9.67 for IRDM. This implies that the market is currently less bearish on the outlook for AAL.
American Airlines Group Inc. (NASDAQ:AAL) beats Iridium Communications Inc. (NASDAQ:IRDM) on a total of 9 of the 14 factors compared between the two stocks. AAL is growing fastly, generates a higher return on investment and has lower financial risk. In terms of valuation, AAL is the cheaper of the two stocks on book value and sales basis, AAL is more undervalued relative to its price target. Finally, AAL has better sentiment signals based on short interest.