• I give United Airlines Holdings, Inc. a hold rating.
• The company suffers from poor annual free cash flow due to large capital expenditures and is excessively leveraged, even for the passenger airline industry.
• United borrows approximately $370 for every $100 raised from investors, with a less than stellar 6.85% ROIC to show for it.
• However, the company is one of the most undervalued among airline stocks, boasting among the highest earnings yield based on forward-looking metrics, and has high-quality earnings.

Investment Thesis

I give United Airlines Holdings (NASDAQ:UAL) a hold rating because, though the company is one of the most undervalued among airline stocks, boasting among the highest earnings yield based on forward-looking metrics, and has high-quality earnings, United suffers from poor

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post United Airlines: Nothing Impressive Other Than Its Valuation appeared first on Up2info.com.

• I initially rated United Airlines a Hold back in October, but after a 60% price surge and a P/E ratio of 10x, I decided to Sell.
• United’s Q3’24 earnings showed strong profitability driven by lower aircraft fuel costs, but this tailwind is likely to fade in importance during FY’25.
• There is still upside to be captured if investors believe in FY’25 EPS estimate and the continuation of 10x P/E, but I’m cautious about it.
• I sold my United shares to lock in gains, as the airline industry is volatile and future upside is uncertain.

In early October I wrote my first article about United Airlines (NASDAQ:UAL) highlighting why I thought that the recent price appreciation (between August and October) deemed the stock a Hold. Since I was personally invested at the time, I mentioned

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post United Airlines: Why I Sold My Shares (Rating Downgrade) appeared first on Up2info.com.

• United Airlines had a remarkable year, achieving a 138% return, and is poised for further gains with strong earnings and capital returns.
• Despite short-term volatility, the airline is forecasted to achieve a $10+ EPS for 2024, with potential for a $12+ EPS in 2025.
• United Airlines has returned to capital returns with a new $1.5 billion share buyback, equal to 5% of the outstanding shares.
• The stock trades below 8x forward EPS targets.

United Airlines Holdings, Inc. (NASDAQ:UAL) had an incredible year as the market finally recognized the earnings sustainability of leading airlines. The big test this year is whether the airline sector can build on the gains in 2025 for a

Analyst’s Disclosure: I/we have a beneficial long position in the shares of UAL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• United Airlines’ stock has surged 84%, significantly outperforming the broader market’s 9% gain, raising concerns about its current valuation.
• Recent market news from other airlines and United’s financial results suggest potential risks, leading to a HOLD recommendation.
• United’s capital allocation and network growth strategies are scrutinized, highlighting potential vulnerabilities.
• Despite positive performance, risks associated with the broader airline industry and United’s specific challenges justify a cautious stance.

United Airlines (NASDAQ:UAL) has seen its share price almost double since we last recommended it 2-months ago, going up more than 84% versus 9% for the broader market. That strength, though, combined with recent news in the market from other airlines, presents a concern.

As we’ll see throughout this article, we view United as NEUTRAL at this time, as we expect it to generate reasonable FCF within the bounds of its valuation but not overall strong returns.

United 3Q 2024 Financial Results

United achieved strong financial results in the quarter, as the airline industry continues to be cyclical.

The company announced a $1.5 billion share repurchase program and annualized FCF at $4.5 billion. Annualized based on the company’s current market capitalization, that puts it at just over a 14% FCF yield, a strong double-digit FCF yield in of itself. However, the global airline industry has had an incredibly strong rebound, driving that.

Plane Shortage

The airlines have also been benefiting from a shortage of planes. That has enabled the prices on popular routes to increase as demand has remained sky-high.

The weakness in aircraft deliveries is especially evident from Boeing, which has continued to struggle. The company is working to bring more of its supply chain in-house and clean that up, and both are expecting deliveries to increase substantially going into 2025/2026. A recovery in deliveries would help to expand capacity substantially.

Given an incredibly volatile aircraft industry, we expect that to put additional pressure on demand in upcoming years and pricing power of airlines. Business travel has declined from COVID-19, but more individual passengers are upgrading in the meantime. With experts foreseeing an increased chance of a recession under Donald Trump’s policies, that could put substantial pressure.

That could hurt the company’s FCF substantially. It’s also worth noting that while FCF remains strong, the company has almost $26 billion in debt and lease obligations. That lofty level will hurt the company’s ability to take on additional debt.

United Network Growth

At the same time, United’s network growth appears to us that the company is starting to reach limits of demand.

The company has added 8 new cities and plans to expand past 800 daily international routes on a schedule that’s approaching 5000 daily flights. However, as can be seen from the above, most of these routes are seasonal and to much less major cities. These aren’t high traffic routes and in our view indicates that the company is struggling to find new routes.

Low-cost airlines filing for bankruptcy in the U.S. as unproductive capacity might increase the company’s potential in the short term, but in the long term we don’t see any clear routes for it to expand. It’s also worth noting that other major U.S. customers are also expanding substantially, along with the domestic carriers of other countries.

Our view is the company does not have a path to substantially grow FCF past current levels. Combined with the risk of a general market downturn, that could quickly make the company’s FCF negative, as COVID-19 did, we are now moving to a neutral rating on the stock.

Thesis Risk

The largest risk to our thesis is air travel remains and will be for the foreseeable future the most effective way to move around. Demand remains high and customers are moving into more premium seating configurations, which is supporting profitability. That could justify United’s valuation for the long term.

Conclusion

United Airlines has an impressive portfolio of assets and the company has continued to invest in its business. We recommended investing in the company before, and the company remains our favorite U.S. carrier with one of the strongest available markets. Despite all that, we feel its share price has outgrown a reasonable valuation.

As a result, the risk-reward is shifting such that we are changing to a neutral rating on the company’s stock, based on its financials and route expansions. Let us know your thoughts in the comments below.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of UAL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post United: Cautious On Valuation After Market Outperformance (Rating Downgrade) appeared first on Up2info.com.

• Shares of United Airlines Holdings have surged over 25% in the last month, taking their YTD gain to an incredible 140%.
• The recent surge in UAL is almost an exact mirror image of what happened in early 2020 during the Covid outbreak.
• While UAL has more than doubled this year, the same can’t be said for other US airlines.

Shares of United Airlines Holdings (NASDAQ:UAL) have surged over 25% in the last month taking their YTD gain to an incredible 140%. Last week, the stock even briefly traded above $100 to new all-time highs. As shown in the chart below, all of this year’s gain occurred in the last four months, as the stock was down on a year-to-date basis as recently as August 5th. While a chart like this may not be too surprising if you were talking about a high-flying tech or biotech stock, for an airline that’s been around for over half a century, it seems almost unbelievable.

The recent surge in UAL is almost an exact mirror image of what happened in early 2020 during the Covid outbreak. In less than four months back then, the stock plunged from the mid-90s down to $17.80 per share as air traffic in the US ground to a halt and people feared Zoom meetings would replace business travel for good.

Putting it all together, a six-year chart of UAL is one of the stranger stock charts you’ll ever see. While the stock is trading at essentially the same levels it traded at five years ago, for more than two-thirds of the period in between, it has been in a drawdown of at least 50% from its pre-Covid all-time high.

While UAL has more than doubled this year, the same can’t be said for other US airlines. The snapshot below from our Trend Analyzer shows where each of the ten largest US traded airlines in the JETS ETF finished off November in terms of their performance and relative to their respective short-term trading ranges. While most of the stocks listed are all trading at short-term overbought levels, on a YTD basis, just four of the ten stocks shown have outperformed the S&P 500, and the only one with returns anywhere close to UAL is SkyWest (SKYW).

Original Post

The post United Back To Flying The Friendly Skies appeared first on Up2info.com.

• United Airlines shares have surged 94% so far this year, driven by strong results and robust flight demand.
• In Q3, despite a 1.6% decline in revenue per available seat mile, United’s revenue rose 2.5%, with net income hitting $1.4 billion.
• United’s valuation is attractive, trading at a discount to peers, with higher margins and lower debt ratios, suggesting further upside potential.
• Risks include fuel price volatility, economic downturns, and labor relations, but stable fuel prices and strong fundamentals make United a buy.

Introduction

I previously covered United Airlines (NASDAQ:UAL) back in June where I discussed my bullish view on the shares. Since then, the shares have risen 94%, significantly beating the wider S&P 500 (SPX) which has only returned 10.5%. This comes as the company reported a strong set of third-quarter results, beating expectations and launched a share buyback even as it continues to invest in and deleverage the business. Combined with falling interest rates, strong flight demand, and reduced fuel expenses, United looks like it’s in a strong position.

In this article, I want to explore in more detail the company’s latest results, the factors that could propel United higher, and why, despite an 80% increase in the share price, I believe United Airlines is still a buy.

Q3 Results

United Airlines released its Q3 results in mid-October. Revenue came in at $14.8 billion, up 2.5 percent compared to the previous year and slightly beating expectations by $70 million. This increase in revenue was largely due to a 5% rise in revenue from premium travel and a 20% increase observed in basic economy revenue.

Despite this growth in revenue, total revenue per available seat mile, a key metric in the airline industry, declined 1.6% year on year, due to an increase in capacity. Overall operating expenses were flat on a per-seat basis, and only up 4.2% overall. This was despite salary costs, United’s largest expense category, increasing 10.4% year on year, with this increase being offset by the fuel price falling to $2.56 a gallon meaning fuel expenses fell 10.4% year-on-year despite an increase in capacity.

All this translated into net-income of $1.4 billion and earnings per share of $3.33, ahead of expectations by $0.16, and exceeding management’s guidance for the quarter. On the balance sheet side, the company continued to deleverage with total debt decreasing to $33.3 billion from $34.2 billion in the previous quarter and $36.7 billion a year earlier.

These results were driven by the continued strong demand for air travel. United experienced its busiest July 4^th and Labor Day holidays. In July it experienced its busiest day on record with 552,000 passengers, and a new record average number of daily customers for a month at 474,000 per day in September. This shows that strong demand for travel continues to drive airline’s results, and it is set to continue into the future. Looking ahead, United continues its strategy of reducing unprofitable domestic routes and focusing on the more lucrative international routes. The airline recently launched a swathe of new routes, adding eight destinations across Europe, Africa, and Asia for 2025, meaning the airline now has over 800 daily flights to 147 international destinations.

Overall, United showed a solid performance in the third quarter. Despite a 1.6% decline in revenue per available seat mile due to increased capacity, the airline’s 2.5% rise in revenue and record passenger volumes during peak holiday season demonstrates resilient demand. Combined with the strategic shift towards more lucrative international routes, and ongoing deleveraging United Airlines looks well positioned for the future. This quarter also gave management the confidence to launch a $1.5 billion share buyback program, the first since the pandemic, whilst continuing to invest in and deleverage the business. This relaunched buyback program gives me further confidence that United is in a strong position, with a positive outlook, and is willing to provide returns to shareholders.

Growing The Business

United over the past few years has seen demand grow significantly coming out of the pandemic. This has been seen both around record setting passengers carried on important holidays, but also throughout the year. Over the past 4 years we can see that total commercial flights worldwide have increased year over year every year.

This phenomenon has not just occurred in other countries but also across the US, United’s home market, and the start or end point of almost all their flights. TSA Volumes have continued to rise year on year, and as of 28^th of November were up 4.7% year over year.

With all this demand United has responded by recently launching a swathe of new routes, adding eight new destinations including Mongolia, Taiwan, Greenland, Italy, and boosting capacity on other routes. This growth in demand has been met by expanding capacity using more planes. There is however a problem, a shortage of planes.

With delays in deliveries at Boeing and Airbus for multiple different regions, there is now anticipated to be a deficit with demand exceeding supply. This puts aggressive growth plans under strain and puts a limit on capacity growth across the industry as a whole. What happens when demand is rising faster than supply? Prices rise. These capacity constraints should result in higher fares benefitting United Airlines, placing it in a position to grow revenue faster than costs increasing profitability. At the same time, United has a large order book of aircraft, enabling it to increase market share compared to its competitors, and improving its competitiveness by offering greater connectivity. Overall, this means that United can continue to benefit from rising demand, both through increasing capacity and higher airfares due to supply constraints on aircraft.

Valuation

United Airlines currently trades at x9.39 forward earnings, significantly lower than the wider market, and its competitors. It trades at an EV/EBITDA of 6.8 a notable discount compared to peers such as Delta Air Lines (DAL), Alaska Air Group (ALK), and American Airlines (AAL), all fellow large American Airlines. Although United Airlines has faced issues with their fleet of Boeing aircraft and other operational issues, I believe this significant discount cannot be justified given United’s positive outlook.

When we compare United Airlines to its peers, we also see that on other key financial metrics such as EBITDA margin and Net Debt/EBITDA, it is among the best performing. It offers the second highest EBITDA margin and the second-lowest Net Debt/EBITDA, while also remaining significantly below the industry average.

Given its higher margins and lower debt multiple compared to peers, and combined with its positive outlook, I believe United Airlines shares do not warrant to trade at such a discount to its peers. Additionally, current forecasts suggest growth in earnings per share over the next few years. I therefore rate United Airlines’ shares a “Buy”.

Risks

As with any investment, there are several risks, I believe it is important to consider. The main risks are near universal across the airline industry, and I covered them in more detail in my previous article on American Airlines. These are the impact of fuel prices, the cyclical nature of the industry, and labor relations.

Currently, I see fuel prices as lower risk. Although conflict in the Middle East does provide some uncertainty, fuel prices have remained stable over the past year and fell slightly in the 3rd quarter. Even though OPEC has delayed the unwinding of their oil production cuts, demand remains weak, especially with a global manufacturing slowdown. This ensures significant excess capacity, putting a cap on how high the price could rise. Combined with the incoming administration in the US supporting greater oil production, I see the prospect of rising fuel prices unlikely.

As with any airline, United Airlines operates in a highly cyclical industry and is incredibly sensitive to economic downturns. During recessions, demand for both business and leisure travel declines significantly, which often leads to significant reductions in revenue. As such, United Airlines’ financial performance is closely tied to overall economic health. Although the American economy appear strong, this may change, and, as an international operator, United can also be impacted by weaker activity in other regions.

Finally, labor relations remain an ongoing issue that can impact United given its heavily unionized workforce. With the flight attendants union authorizing strike action the prospect of strikes looms, which would force United to ground flights. Contract negotiations have been suspended to 2025, but only time will tell if an agreement is reached. Strike action is not the only form of labor action that could affect United, with large pay rises often demanded, significantly adding to labor costs.

Conclusion

In conclusion, I believe that United Airlines continues to offer an opportunity for investors despite the more than doubling in the share price so far this year. With demand for air travel holding strong, stable fuel prices, solid third-quarter results, and the restart of share buybacks, United is well positioned.

Compared to its peers, its valuation remains attractive, with strong EBITDA margins, lower debt ratios, and the lowest EV/EBITDA multiple in its peer group. While the risk of worsening labor relations with the flight attendant union remains, United’s ongoing growing route network, and the company’s solid fundamentals, suggest further potential upside. As such, I believe the shares remain a buy.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post United Airlines: Solid Results, Strong Outlook, Undervalued Stock appeared first on Up2info.com.

• For 3Q24, United Airlines generated $14.85 billion in revenues, representing a 2.48% year-on-year growth. Although EPS of $3.33 beat estimates, net income fell by 15.13% year-on-year.
• Expect the continued strength and demand in the airline industry to continue to serve as tailwinds for UAL. ACI expects passenger growth for 2024 will surge by 7% in North America.
• UAL is poised to expand its revenue through multiple initiatives such as expanding its international reach, increasing its fleet size, and enhancing other ancillary programs such as MileagePlus.
• Although the company is reluctant to give details, UAL’s plan to expand margins will be highly accretive to its bottom line and free cash flow.
• Valuation analysis suggests a potential upside of more than 50% exists if UAL is able to successfully expand its fleet and expand its pre-tax net income margins.

Introduction

United Airlines (NASDAQ:UAL) is one of the largest airlines in the United States. Currently, the company employs approximately 104k full-time employees and has 945 mainline aircraft. Domestic flights are the biggest revenue contributor for UAL, representing more than 50% of the company’s total revenue; UAL also serves the Atlantic, Latin America, and Pacific markets.

Although UAL had surged more than 120% this year, my analysis suggests that there will be further upside potential of more than 50% for investors. UAL will not only benefit from the continued strength of the airline industry but also has multiple initiatives to ensure revenue capacity and margin expansion. In this report, I will demonstrate why investors should consider UAL in their portfolios.

Latest Developments

For 3Q24, UAL generated $14.85 billion in revenues, representing a 2.48% year-on-year growth and -0.95% sequential decline; additional UAL beat revenue estimates by $116.19. Gross margin improved due to relatively lower cost of goods; UAL’s gross margin improved to 64.02% as compared to 62.27% in the same period last year.

However, net margin deteriorated primarily due to higher operating expenses. As a percentage of revenues, SG&A for 3Q24 increased to 33% as compared to 30.59% in the same period last year. Total expenses as a percentage of revenues increased from 50.19% to 53.82%. On a year-on-year perspective, net income fell by 15.13%; however, UAL posted an EPS of $3.33, beating estimates by $0.16.

Strong Demand And Outlook Of The Air Travel Industry Will Continue Supporting UAL’s Growth

As of 3Q24, we continue to see strength and demand in UAL. UAL’s revenue from its domestic segment has surged 3.21% year-on-year. Other regions such as Latin America and the Pacific have shown similar strength, surging by 4.05% year-on-year and 11.10% year-on-year, respectively. Revenues from the Atlantic underperformed, declining 3.13% year-on-year.

Looking forward, despite a deteriorated consumer environment, demand for UAL is likely to persist as air travel strength remains healthy. As of 11th November 2024, cumulative TSA checkpoint travel numbers in the United States have surged 4.99% year-on-year. Looking ahead, the Airports Council International (“ACI”) expects demand to be supported by global disinflation. ACI estimates that passenger growth for 2024 will surge by 7% year-on-year in North America, representing 107% of 2019 levels; across the globe, ACI expects a 10% year-on-year growth.

More importantly, the outlook for air travel remains healthy and is likely to continue seeing growth. ACI expects global air travel will continue to grow at a CAGR of 5.57% through 2028. Total passengers will likely increase from 9.5B in 2024 to 11.8 billion by 2028. That being said, it will be important for us to closely monitor key risks such as geopolitical tensions, labor market disputes, and delays in aircraft deliveries; these are the major risk factors that may cause a dislocation in demand for air travel.

UAL Has Multiple Levers To Expand Revenues

Apart from industry-level tailwinds, UAL is poised to expand its revenue through multiple initiatives such as expanding its international reach, increasing its fleet size, and improving other ancillary programs to enhance demand and retain customers.

In terms of UAL’s international reach, the company plans to continue its international expansion. Recently, the company announced its largest international expansion in history. By mid-2025, UAL will add 8 new destinations covering Ulaanbaatar (Mongolia), Kaohsiung (Taiwan), Nuuk (Greenland), Palermo (Italy), and more. UAL will also offer new routes and connections such as Tokyo-Ulaanbaatar, Washington-Dakar, and Houston-Puerto Escondido. All of these indicate that UAL remains committed to expanding its revenue capacity.

Supporting its international expansion, UAL has committed to 676 new aircraft. Although deliveries from Boeing (BA) will be delayed, UAL still expects to receive another 22 aircraft for the rest of FY2024 and another 78 aircraft in 2025, bringing the total aircraft for FY2024 and FY2025 to approximately 994 and 1072. Utilizing FY2023 data, UAL had generated about 56 million per airplane; all else equal, and without factoring any inflation, this will translate to an additional $2.7 billion (+5.11% year-on-year) and $4.3 billion (+7.74% year-on-year) in revenues for FY2024 and FY2025, respectively.

To actively enhance demand and retain customers, UAL continues to work on its MileagePlus and Connected Media program, investing in critical technologies and enhancing program features. In relation to MileagePlus, UAL has included mile pooling, allowing members to pool miles including up to four people, including children. By Mid-2025, the program will also offer more ways to redeem points. Overall, revenues from MileagePlus have already increased by 11% while active membership was up 13%.

Potential Margin Expansion Will Be Highly Accretive To The Company’s Bottom Line

Apart from continuously driving growth and expanding revenue capacity, UAL’s current priority is also to expand their margins. Unfortunately, as of the latest earnings call, the management team had stated that they are not prepared to give guidance on margin expansion.

However, the management team did emphasize that UAL is at “an inflection point that would kick off a multiyear run that looked a lot like the 2012 to 2014 for airline earnings”. To put it into context, pre-tax profit margin was initially negative in 2012. Pre-tax profit margin continued to improve up to 2015, expanding significantly to approximately 11%; during this period, pre-tax profit margin expanded by about 436 bps annually.

As a reference, in FY2023, 1% of revenues is approximately $537 million, representing at least 20% of net income. UAL does not need to expand its margins by 400 bps per year to generate significant value. Savings of merely 2% a year will be significant and highly accretive to the company’s bottom line and free cash flow.

Valuation Analysis Suggests Significant Upside Potential

Based on the following assumptions: (1) UAL to expand its fleet by 49 in FY2024 and approximately 78 per year through FY2028, (2) expand its pre-tax net income margins slightly by 0.18%, 0.50%, and 2% for FY2024, FY2025, and FY2026 to FY2028 respectively, and (3) a terminal growth rate of 2% and WACC of 8.40%, my DCF model suggests, UAL’s implied share price should be $138.

Closing Remarks

Overall, UAL remains an attractive opportunity despite its share price surging by more than 120% YTD. Apart from continued strength and demand in the industry, UAL is employing multiple initiatives to ensure revenue expansion. The company’s priority in expanding margins will also be highly beneficial to shareholders and the valuation of UAL. More importantly, upside potential exists. Based on my valuation analysis, there is an upside potential of 54%.

That being said, investors should closely monitor the developments surrounding BA. Aircraft delivery delays from BA will be the most important factor affecting UAL’s ability to expand its revenue meaningfully. Although BA’s worker strike has ended, the company is still struggling. BA had just recently decided to cut 10% of its workforce and may have liquidity issues. UAL expects 78 aircraft in 2025; if we assume that BA only delivers 45 per year through FY2025 and FY2028, the upside potential is merely 8%.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in UAL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post United Airlines: Revenue And Margin Expansion Will Bring The Company To New Highs appeared first on Up2info.com.

• United Airlines’ Q3 earnings report and guidance led to a new 52-week high, nearing pre-pandemic stock prices.
• Passenger revenue growth is slowing, but cargo revenues surged 25.2% due to Middle East freight challenges and Asia Pacific capacity expansion.
• Operating income dropped 10% due to higher non-fuel costs, but Q4 EPS guidance shows strong year-on-year growth, boosting investor confidence.
• A $1.5 billion share repurchase program and increased free cash flow projections signal strong future confidence, maintaining a buy rating.

United Airlines (NASDAQ:UAL) posted its third quarter earnings on the 16^th of October and investors seem to have liked the results, sending the stock to a new 52-week high. In fact, at the current prices, United Airlines stock is closing in on pre-pandemic stock prices. In July, I covered United Airlines and attached a $65.90 price target based on half of the upside materializing and an $84.86 price target if all upside would materialize. The first price target has now been reached and with the third quarter earnings in, it is a good moment to analyze the earnings, risks and opportunities and assess whether there is additional upside for United Airlines stock.

United Airlines Unit Revenues Normalize

United Airlines passenger revenues increased 1.6% on a 4.1% increase in capacity, pointing at some further reduction in the unit revenues. That’s not extremely alarming, as unit revenues are actually following a trend of normalization after the pandemic surge in unit revenues.

On the domestic market, the capacity increased by 3.3% while unit revenues declined by less than a percent, so that is something I view as measured capacity expansion. The same is observed in the European market, and those markets combined saw modest capacity growth as United Airlines is trying to stabilize the unit revenues. The Middle East/India and Africa markets saw a significant decline in capacity due to the turmoil in the Middle East and that led to a 35.7% decrease in passenger revenues, partially offset by higher unit revenues as many airlines have reduced their flight offering to the Middle East.

The opposite is happening in the Asia Pacific market where airlines, including United Airlines, continue expanding capacity as unit revenues stabilize while on the Latin American market, we see a similar trend as on the domestic and European market but with higher revenue growth partially driven by some airlines facing financial challenges in Latin America. So, overall, we see some erosion to the unit revenues and United Airlines has been able to squeeze out a modest growth in revenues, which seems to be something that many airlines are targeting at this point.

United Airlines Profit Falls

United reported total revenues of $14.83 billion, which beat analyst estimates by $70 million. Interesting to note is that the cargo revenues increased by 25.2%, which, I believe, is driven by the challenges faced for ocean freight in the Middle East and the expansion of capacity in the Asia Pacific region. Both factors boost the revenue potential of cargo. Other operating revenues, primarily driven by redemption of miles, increased by 7.9%. So, the passenger revenues, while it is obviously the biggest contributor to revenues, saw the smallest growth rate driven by normalization of unit revenues and Boeing and Airbus being unable to meet delivery schedules.

Total operating expenses grew 4.2%, slightly higher than capacity expansion. Almost all expense items saw growth in excess of capacity expansion, but this was partially offset by lower fuel costs despite higher fuel consumption. So, overall, we do see the non-fuel cost continue to experience inflated growth and one of the biggest drivers is the increase in headcount and salaries, driving the line item up by 10.4%. The result is that operating income dropped 10% to $1.565 billion, indicating a margin decrease from 12% to 10.5%.

In terms of unit revenues, there was a 1.6% decrease while cost per available seat-mile remained stable, but that was mostly driven by the reduction in fuel costs. Excluding fuel costs, there was a 6.5% increase in costs which actually reflects the reality that while unit revenues are normalizing further, the costs have been inflated due to wage increases. The company reported core earnings per share of $3.33, which exceeded analyst estimates by $0.16.

What Does United Airlines Expect For Q4 Earnings?

For the fourth quarter, United Airlines expected adjusted diluted earnings per share between $2.50 and $3.00 with analysts expecting $2.90 in earnings per share marking a 44.8% year-on-year growth.

What Are The Risks And Opportunities For United Airlines?

I don’t believe that the third quarter results were the reason why United Airlines stock took off. The reasons why I believe that the market has been satisfied with United Airlines is because the fourth quarter earnings per share guidance points at significant year-on-year growth. Furthermore, United Airlines announced a $1.5 billion buyback that is separate from the share repurchase in the third quarter to offset the exercise of 6.4 million warrants issued to the US Treasury under the Payroll Support Program and CAREST Act. The share repurchase authorization, which will see $500 million worth of shares being repurchased this year, is the strongest sign of confidence in the company’s trajectory and that the pandemic is now a rearview mirror event.

Is United Airlines Stock Still A Buy?

To determine multi-year price targets The Aerospace Forum has developed a stock screener which uses a combination of analyst consensus on EBITDA, cash flows and the most recent balance sheet data. Each quarter, we revisit those assumptions, and the stock price targets accordingly. In a separate blog I have detailed our analysis methodology.

Between 2023 and 2025, the EBITDA is expected to have a CAGR of 5.2%. Overall, the EBITDA generation between 2024 and 2026 has barely changed but the expectations for 2024 have increased by 2.7% or $210 million, partially offset by around $165 million downward adjustments for 2025 and 2026. The free cash flow has been revised up significantly by around $575 million, which, I believe, is primarily driven by delivery delays of new airplanes which drive down capital expenditures. As a result, the price target for 2024 using the company median EV/EBITDA has been increased to $99.18 which is an increase of $15 per share. Interestingly, Wall Street analysts have a consensus target of $81.81 which is lower than the previous target I had.

Conclusion: United Airlines Shows Confidence In The Future

The third quarter results were not great in the sense that we see that passenger revenue growth is becoming harder and harder to realize while the cost have ticked up significantly. Lower fuel costs kept the margin contraction low, but if we strip that, we do see that there is a high cost basis with a lack of strong top-line growth. The good news is that United Airlines is expecting a strong fourth quarter, and the share repurchase program of $1.5 billion shows a lot of confidence in the future. As a result, I am maintaining my buy rating for the stock.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post United Airlines Stock Soars To 52-Week High On Bullish Future appeared first on Up2info.com.

• United Airlines is favored over Delta following the IT outage.
• The airline sector is normalizing post-Covid, with United well-positioned for higher profitability and potential capital returns to shareholders.
• United trades at 5x 2025 EPS targets, with a projected 14% earnings growth, and has significantly reduced its debt, enhancing financial stability.

With a legacy airline struggling with an IT outage, United Airlines Holdings, Inc. (NASDAQ:UAL) has taken flight to post-Covid highs. The airline stock is still incredibly cheap, but whether or not the market will reward the stock with a viable market valuation is a far different story. My investment thesis remains ultra Bullish on United Airlines looking for a further move higher.

Delta Still Highly Profitable

Before the market open, Delta Air Lines (DAL) kicked off the earnings season with a solid Q3’24 report. The legacy airline faced a tough period in the September quarter due to the IT outage causing the cancellation of 7,000 flights.

Despite the tough period, Delta Air Lines still reported a strong EPS of $1.50 as follows:

The numbers are a promising indication of the quarterly report for United Airlines coming up next week after the close on October 15. The consensus analyst estimates are for the following Q3 numbers from the airline:

• EPS of $3.14
• Revenue of $14.7 billion, up 1.7%

The quarterly numbers were already tough due to the overcapacity issues in the airline sector during the quarter. The airlines were all clear on the Q2 earnings reports that industry capacity cuts weren’t going to improve yields until the August/September timeline.

Delta Air Lines reported flat revenue growth and solid profits despite an estimated $550 million hit during the quarter, causing a $0.45 impact on EPS. The management team estimated a $380 million hit from lost revenue due to the flight cancellations and another $170 million boost to costs for accommodating passengers with delayed flights.

What isn’t easily measurable is the brand impact. Heading into the outage, Delta Air Lines was generally viewed as the leading legacy airline and now United Airlines is likely on better footing.

Since the outage on July 19, the stock has far outperformed Delta Air Lines with a 30% gain.

The ironic part is that United Airlines didn’t start pulling away from the stock returns of Delta until the start of September. Delta is embroiled in a public corporate dispute with CrowdStrike (CRWD) and Microsoft (MSFT) and this likely isn’t helping the brand view.

Future Focus

If an investor focuses beyond the Q3 report, Delta guided to much improved Q4 numbers as follows:

Even with the corporate issues, Delta Air Lines guided to a Q4’24 operating margin of 12% leading to an EPS of $1.60 to $1.85. The holiday quarter isn’t the strongest quarter for travel, yet the airline predicted one of the strongest December quarters in the history of the airline despite warning of slower travel around Presidential elections.

The view here is that United Airlines reports even stronger numbers. Delta Air Lines is guiding to an EPS technically below the consensus estimates of $1.79, but still within the range for a sharp jump from $1.28 last Q4.

The consensus analyst Q4’24 estimates for United are $2.76 per share for a nearly 40% boost from last year. The view here is that the stock isn’t valued based on a sharp jump in earnings followed by a big boost in 2025 numbers.

In a lot of ways, 2025 should be the first year of normalization in the travel sector. The last couple of years were led by revenge travel in 2022 and the reopening up of international travel in 2023 followed by some domestic overcapacity issues in 2024.

The airlines have now adjusted capacity while dealing with aircraft issues from Boeing (BA) delivery issues to Pratt & Whitney engine problems. The end result is a sector entering 2025 with capacity more in line with the normalized travel demand following Covid.

According to industry data, passenger totals have now held above the 2019 levels suggesting a higher level of profits going forward is very possible. Over the key summer months, TSA throughput topped 2.6 million passengers per day while the 2019 average during this peak period was only 2.4 million passengers.

United enters the quarterly earnings report with the stock only trading at 5x 2025 EPS targets of $11.18. The consensus estimates have earnings growing at a nearly 14% clip next year.

The big rally in the last couple of months to reach the post-Covid highs is only a return of the stock to the start of a more normalized valuation. United Airlines still trades at a lower forward P/E multiple with the market still favoring Delta.

Delta has already started capital returns and United can likely flip the switch with positive indications that the debt load is under control. United Airlines ended the last quarter with net debt below $16 billion after producing $3.4 billion in FCF for the 1H’24.

The September quarter is highly profitable allowing the airline to already pre-pay a $1.8 billion loan on the MileagePlus program with an interest rate of nearly 11% saving $200 million in annual interest expenses. The airline only had net interest expenses of $237 million in Q2 and the repayment of higher debt will help eliminate further interest expenses.

At the Morgan Stanley conference, CFO Mike Leskinen was clear capital returns are around the corner with expensive debt paid off and the company favoring stock buybacks due to the cheap value:

This industry needs to get better at returning cash to shareholders. We need to have more regular returns of cash to shareholders. Now, I passionately believe that those returns, when you’re trading at four and five times earnings, should be the form of buyback, not dividend. I think dividend, you need to – a dividend is great and attracts different types of shareholders when you’ve already trading at 10 or 12 times, four or five times it’s so opportunistic to buy back shares.

Our balance sheet now is in a great spot. I talked on the Q2 call of a couple of pieces of debt that we had to repay. We have repaid those pieces of debt. Now my incremental debt cost is 125% to 5.25%. There’s no more expensive debt to repay.

United Airlines announcing a stock buyback in the next few quarters could light a further spark under the stock. Of course, the biggest risk is the stock pulling back after the recent rally due to war in the Middle East or any other issue impacting travel. In reality, airline stocks don’t need a lot of negative views to watch the stocks collapse, no matter the cheap valuation.

Takeaway

The key investor takeaway is that United Airlines is the favored legacy airline stock after the IT outage should lead to some brand damage at Delta Air Lines. In addition, United trades at a cheaper valuation while the stock could easily have an additional catalyst from the announcement of a share buyback in the next few quarters.

Investors should always prepare for an airline stock sell-off, but the stock remains too cheap here and should trade much higher.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of UAL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post United Airlines: Strong Read From Delta’s Earnings appeared first on Up2info.com.

• United Airlines has seen an impressive price appreciation of more than 50% since its bottom in early August.
• Spirit’s likely bankruptcy and the continued strength of U.S. consumer are both tailwinds that could take the stock higher.
• However, even if the company recovers its historic Price to Earnings Ratio of 8x, the 30% upside is likely insufficient given the risks that airlines face.
• If risks materialize, United could see its stock price be back at $40. With a Risk-Reward like this, I believe United is a Hold for now.

United Airlines (NASDAQ:UAL) is on a great streak lately, gaining more than 50% since its recent bottom on August 5 at $37.88. It closed last Friday at almost $60, which is close to its post-pandemic high of $60.77 in March 2021. That has come after news that Spirit Airlines (SAVE) may file for bankruptcy soon, making the markets forget somewhat about the recent spike in oil prices.

United Airlines is usually mentioned alongside Delta Air Lines (DAL), Southwest Airlines (LUV) and American Airlines (AAL), which form the Big 4 in terms of market share for the U.S. domestic market. Interestingly, as can be seen from the year-to-date chart below, these four airlines haven’t performed in a similar fashion recently, despite all being punished throughout the summer due to weak pricing.

I’ve also included JetBlue (JBLU), Frontier Holdings (ULCC) and Alaska Air (ALK) to see how the stock of each airline responded to Spirit’s news. It’s no surprise that the market appointed JetBlue and Frontier as the clear winners, with gains of +14.24% and +16.43%, respectively, last Friday. What may be a surprise is that within the Big 4, the market seems to have chosen United Airlines as the winner, gaining +6.47% — although American Airlines stock also responded very positively.

In this article, I’ll confirm the view that United Airlines can benefit significantly from Spirit’s bankruptcy while also improving on operational metrics. However, the recent stock price run seems to have moved United Airlines out of the “bargain sector”. Airlines are very sensitive to business cycles, and any shock is enough to wipe out investors’ gains. Therefore, I’ll start my assessment of United Airlines with a Hold.

Gaining Share Through Spirit’s Bankruptcy

Below is the share price gain from last Friday after reports that Spirit may be flirting with bankruptcy and the release of a strong jobs report. It’s definitely possible that the strong economy has a lot to do with the good performance of the airlines – a rising tide lifts all boats. However, since not all had the same behavior, we should look into the Spirit bankruptcy possibility to differentiate the airlines.

So what I went to search for was how these airlines overlap with Spirit’s operations and who may be able to grab some market share in the process. The table below shows Spirit’s passengers in millions in each of their main airports, as well as the Market Share position of each airline within that airport. Note that Spirit’s passengers may be double counted as a flight between Atlanta-ATL and Orlando-MCO would count in each of the airports. I have also ignored the regional carriers like SkyWest Airlines (SKYW).

Let’s now try to match this data with the price movement from last Friday. JetBlue and Frontier were chosen as the primary winners with both gaining close to 15%. The likely reason for this is that in all four of Spirit’s major markets (ATL, MCO, LAS and FLL) these two carriers have important operations, with Frontier in three and JetBlue in one. It makes sense to think that Spirit customers would tend to flock first to Frontier, JetBlue and Southwest instead of Delta, American and United. In these four markets I mentioned, United doesn’t have a significant presence in any of them, while they are important for Delta (ATL, MCO and LAS) and American (MCO, LAS).

The remaining airports have a significantly lower number of passengers for Spirit, but are still important nonetheless. While Delta may have an opportunity in Detroit and American in Dallas, Miami is kind of split between a lot of players (although American has the highest share by far). What’s left is Houston, Newark and Chicago, all three significant hubs for United Airlines and without an important presence of Southwest, Frontier and JetBlue. That’s not to say that these airlines couldn’t expand into these markets if the opportunity comes, but they are more likely to focus on Atlanta, Orlando, Las Vegas and Fort Lauderdale where they already have a good position.

This leaves United with a significant opportunity to grab share in these three markets. Spirit transported close to 10 million passengers in Houston, Newark and Chicago, while United transports a little more than 160 million passengers each year. So this market share gain could definitely support some incremental growth in the coming years for United, and it would not only mean more volume, but also a better pricing position.

Financials

I’ll refrain from performing any complicated estimates of discounted cash flow for United Airlines as I learned a hard lesson on Spirit’s recent debacle. Airlines should be assessed on their near-term earnings power and its position in the business cycle.

When reviewing the latest United’s financials, it’s interesting to compare FY’19, FY’23 and FY’24 YTD. As can be seen from the P&L below, the major gap in profitability compared to FY’19 is driven by Cost Of Revenue, with Aircraft Fuel playing an important role in FY’23 and decreasing in FY’24 YTD while Salaries has picked up in FY’24 due to the new salary agreement with pilots.

So there is still work to be done at United to recover pre-pandemic profitability, and the weak pricing mentioned before during the summer didn’t help. However, improvement in Aircraft Fuel both from a receding Jet Fuel price and a significant fleet renewal should continue to help the company further. Also, the increase in salaries should have its hardest hit this year with an increase of ~15% and the remaining years somewhere between 3% to 5%.

The fact that United’s profitability is still far from 2019 and has even taken a hit during 2024 due to salary increases might sound incoherent when contrasted with its more than 43% price appreciation year-to-date. However, this means that the market is anticipating some overdue improvements in United’s financials in the coming quarters. That’s why I started saying that I believe United isn’t a bargain anymore. That definitely doesn’t mean it doesn’t have room to appreciate more, just that it probably passed from being at the bottom of the cycle to being at the midpoint.

Upcoming Earnings and Valuation

United is expected to report Q3’24 earnings on October 16th and judging by its latest track record, it would be no surprise if it overcomes consensus EPS again. Note the comparison quarter-over-quarter: although Q3’24 is expected to be lower than Q3’23, analysts seem to expect improvements in future quarters compared to prior periods.

There is also the fact that the average of estimates points to United generating close to $10 EPS in FY’24 and more than $11 in FY’25, which would translate to a Forward Price to Earnings of 6.12 in FY’24 and 5.36 in FY’25. Airlines’ Price to Earnings (PE) can be very volatile, but 6x Forward PE is definitely not a stretch. By taking a look at United’s 10-year PE Ratio history, it’s noticeable that it spent the majority of the time between 2014 and 2019 above the 8x Forward PE threshold.

This is why I believe that United Airlines at a price close to $60 and with a Forward PE of 6 is a Hold and not a Buy. If the market revalues the company to 8x Forward PE, this is a ~30% upside to the current price. Although good, it may not be enough for an Airline given the risks that always exist and can wipe out any gains. Investors who would like to buy this company may have to wait for a pullback that brings the share price below $50 or just pass it entirely.

Risks

Airlines face the same risks as normal companies, but with an exponential impact. There are two major risks right now: the possibility of an oil shock due to escalating tensions in the Middle East and any weakness in U.S. consumer spending that could trigger or indicate a recession. With razor-thin margins like 4.4% YTD after the incremental salaries negotiated with pilots, any negative impact coming from rising Jet Fuel prices or even lower pricing power could turn the company in negative territory. This would definitely lead to a revaluation of United’s multiple and impact investors returns. There is no reason why United wouldn’t be back below $40 in this scenario, so that’s why I do not believe the company is a Buy at $60.

Final Remarks

As you’ll see below in my disclaimers, I currently own shares of UAL, which I bought in November of 2023. At $40 it seemed to me a good value proposition and I continue to believe that United’s share price when below $50 presents a Buy opportunity. Although I don’t expect to sell now, any further weakness in the economy or a major shock in Jet Fuel prices may lead me to sell. If all goes well, I do expect to ride this stock until it recovers its Price to Earnings ratio of 8x.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of UAL, DAL, LUV, JBLU, SAVE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post United Airlines: A Hold After Recent Take-Off appeared first on Up2info.com.