AMR shares pay off for investors despite bankruptcy

04/03/2014 4:27 PM

04/03/2014 4:29 PM

Holding onto shares of AMR Corp. is paying off handsomely for investors.

The stock, which traded for about a quarter in the low days of the airline’s bankruptcy, is now estimated to reach as much as $28 when American Airlines distributes the final shares of its new “AAL” stock to AMR shareholders Tuesday.

Even though the merger of American Airlines and US Airways closed in December, bringing the former AMR out of bankruptcy, shareholders of American’s old parent company had to wait 120 days before they could realize the full value of their shares under a complicated equity distribution formula approved by the Bankruptcy Court.

AMR shareholders were guaranteed to own only 3.5 percent of the merged airline and initially received just 0.067 share of AAL for each AMR share owned. Many people were confused about how their shares, which were worth $11.39 the day before the merger closed, were worth only $1.60 once the airlines combined.

But the equity distribution formula included additional shares for creditors, labor unions and old AMR shareholders at 30, 60, 90 and then 120 days after the merger, based on the current value of the stock. Since AAL shares have continued to rise, more shares were distributed. To date, AMR shareholders have received 0.54 share of AAL stock for each AMR share.

During bankruptcy, American’s old stock dropped to as low as 26 cents after the company filed for bankruptcy in November 2011. By the time the merger closed in December, the price had reached as high as $13.50.

Shares of the combined American Airlines and US Airways are up more than 50 percent since the merger closed. American’s stock closed down 37 cents Thursday at $37.34 a share.

On Wednesday, JPMorgan Chase analyst Jamie Baker estimated that the final value of old AMR shares, which last traded Dec. 6 at $11.39, could be $28.19 once the final stock distribution occurs.

Wall Street analysts say American’s current stock price could drop in the short term as creditors and unions sell shares to lock in profits.

“Given no change to our unrelenting bullishness as to the post-takeover earnings prospects of AAL, we would recommend investors exploit any unexpected pull-back related to the Day 120 equity conversion,” Baker told investors.

However, analysts say, the long-term prospects for the stock and the company are bright.

“Many creditors are long gone and many people set to receive AAL shares probably want AAL shares,” Wolfe Research analyst Hunter Keay wrote in a research note March 28.

And in a new note Wednesday, Keay listed 100 reasons why he is bullish on the stock, including that it’s cheap when compared with other airlines’ financial performance.

“We believe AAL is a very cheap stock with tremendous opportunities to improve margins and earnings over the next couple years while outperforming peers on a relative basis,” Keay said.

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