Instructions for final Paper on the Airline Industry: American Airlines
Both the papers and the presentations should start with an industry overview, including
1) a description of the overall industry
2) major issues in the industry such as competition, disruptive forces, new entrants, new technology, etc.
3) comparable analysis - a spreadsheet comparing your companies, including growth rates, margins, various other ratios from class. Also, please explain why these numbers differ between your companies.
4) comparison of valuations - how does the market value your companies and how do they compare. use EV/EBITDA, P/E ratio and dividend yield. Why are they valued differently by the markets? Some possible reasons are different growth rates, one company taking market share from others, different margins, etc.
Are your companies a buy or a sell?
There should also be a separate section for each company with a discussion of their business, how it is divided into different business units, how it is divided geographically and how the company makes money. e.g. what are its main revenue sources and what are its costs and various margins. Please discuss opportunities for the company to improve and risks that it will deteriorate. Include historical financials and trend/common size sheets with reasons for trends. Include important ratios for your company.
Also, please discuss credit quality of your company using debt/EBITDA and interest coverage ratios.
Detailed explanation of Paper
Perform a full analysis of the Financial Statements (Balance Sheet, P & L, Statement
of Cash Flows) for three years (2020, 2019, 2018), using the 10Ks (including financial
data, footnotes, and MD&A (Manager's Discussion & Analysis)) and a variety of other credible
resources to research American Airlines. Resources include but are not limited to: 10Ks filed with the
SEC (www.sec.gov), Corporate Websites, Annual Reports and investor presentations (usually found
on the websites under Investor Relations) and earnings conference call transcripts.
Note:
After completing the analysis, determine which companies in the airline industry performed better during the three-year period, and back-up how the conclusion was reached.
1. Company Info--Write a brief description of American Airlines, its industry(airline industry), its products, and its markets.
2.
Industry Analysis
What are the major trends and issues facing your industry? Discuss both challenges and
opportunities:
-Market concentration
– market shares
- Highly concentrated or lots of small players
-Trends
-Pricing, volume, growth
- Profit margins
Who’s growing, who’s shrinking?
- Disruption / new products?
-Barriers to entry
- Prepare comparable analysis spreadsheet
-Anything else that’s important to know
Business Analysis
What are the major issues facing the company? Discuss positives and negatives of the American Airlines as it relates to its industry and the current environment. How does the companies’ financial statements reflect these issues?
Business model / strategy
- Comparison of company to others in industry
-Relative strengths and weaknesses
-Market share
- Cost of production
-Trends
-Volume, pricing, appropriate metrics
-Capital spending needs
-Disruptive forces
-What are they doing to compete?
Major events / issues
Anything else that’s important to know about American Airlines.
2. Company News--Search for and report on at least two major events that have affected the company’s performance over the past year.
3. Stock Market Activity--Describe the companies’ market activity over the past three years.
Resources include, but are not limited to: http://money.msn.com, http://finance.yahoo.com,
http://google.com/finance.
3. Financial Statement Analysis—
Prepare & analyze a) condensed, b) trend, and c) common-size
financial statements for American Airlines for a three-year span (current year, and two prior years).
Note: Gather the financial information from each company's 10Ks (www.sec.gov).
a) condensed balance sheet, condensed income statement, & condensed statement of cash flows.
b) trend analysis balance sheet, trend analysis income statement, & trend analysis cash flows. Create
the trend financial statements using Excel formulas that reference the condensed financial statements.
c) common-size balance sheet, common-size income statement, and common-size statement of cash
flows.
Note: Create the common-size financial statements using excel formulas that reference the condensed
financial statements.
Comment on the trends in the growth of assets, liabilities, and stockholders' equity and overall financial
risk.
Comment on the trends in the growth of revenue, cost of goods sold, expenses, and overall profitability.
Comment on the trends in the growth of operating, investing, and financing activities, and the overall
cash position.
5. Ratio Analysis--Compute financial statement ratios for both companies for a three-year span (current year, and two prior years), AND compare to industry norms (Time Series (Trend) Analysis &
Cross-Sectional Analysis).
Show all formulas used to calculate the following ratios:
Profitability:
Gross Profit Margin
EBITDA Margin
Net Profit Margin
Return on Assets
Return on Equity
DuPont Analysis of ROE
Earnings Per Share (EPS)
Efficiency:
Asset Turnover
Accounts Receivable Turnover
Accounts Receivable in Days
Inventory Turnover
Inventory Days
Liquidity:
Current Ratio
Quick Ratio
Cash Flow Liquidity
Solvency:
Debt/EBITDA
Debt Ratio
Times-Interest-Earned
(EBITDA-Capex)/Interest Expense
Free Cash Flow
Cash Flow Adequacy
Future financing needs: Debt maturities, capital spending
Capital Structure
Types of debt, equity
Valuation:
Trailing and forward Price Earnings (P/E)
Dividend Rate per share / Dividend yield
EV/EBITDA
FCF Yield
Compare the three years of ratio information for each company. What do these ratios say about
profitability, efficiency, liquidity, solvency, and investment? Indicate which ratio is stronger/weaker,
quicker/slower, more/less liquid, or more/less risk.
Note: Industry norms (average) info can be found at money.msn.com, finance.yahoo.com,
csimarket.com
What does your analysis of these ratios say about profitability, efficiency, liquidity, solvency, and investment as compared to their competitors?
6. Research Summary- would you advise that others invest in American Airlines one or any of its competitors from an equity and a credit point of view? Prepare a written summary of your analysis and investment recommendation and provide a minimum of five significant points based on research, analysis, & sound reasoning.
General Info:Include excel spreadsheets, graphs, charts, and other items to your paper to enhance the overall project.This is a 11- 15page paper ---Type double-spaced, using a 12-point Times New Roman font. Cite all sources and include a bibliography. Points will be deducted if reference page is not added.