Even With A 26% Surge, Cautious Investors Are Not Rewarding American Airlines Group Inc.'s (NASDAQ:AAL) Performance Completely

American Airlines Group Inc. (NASDAQ:AAL) shares have continued their recent momentum with a 26% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.7% in the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that American Airlines Group's price-to-earnings (or "P/E") ratio of 17.8x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's superior to most other companies of late, American Airlines Group has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for American Airlines Group

Want the full picture on analyst estimates for the company? Then our free report on American Airlines Group will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like American Airlines Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 118% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 50% each year over the next three years. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.

With this information, we find it interesting that American Airlines Group is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Its shares have lifted substantially and now American Airlines Group's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of American Airlines Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with American Airlines Group, and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.