Stock Report – United Airlines

United: Looking like good value as long as risks remain short term

United Airlines is based in Chicago and is the holding company for both United Airlines and Continental Airlines.

United Airlines transports people and cargo throughout North America but also to destinations in Asia, Europe, the Middle East and Latin America.  The company operates more than 4,800 flights a day to 353 airports across multiple destinations. As of Dec 31, 2018 the carriers total fleet size stood at 1,329.

Passenger revenues account for the bulk of its top line. In 2018, 91.3% to revenue came from passenger revenues. Cargo revenues accounted for approximately 3% with the remaining classified as “other”

Domestic revenue accounted for 61.9% of total revenues in 2018 with trans-Atlantic revenue second at 17.2%

Earnings History and Estimates

Q1 Q2 Q3 Q4 Annual
2019 $1.15 A $4.21 A $4.07 A $2.67 A $12.05 A
2020 $0.87 E $4.54 E $4.32 E $2.94 E $12.57 E
2021 $1.01 E $5.25 E $5.08 E $3.32 E $14.36 E

Strong demand for air travel is providing a boost to United Airlines’ passenger revenues and earnings are being supported by the decrease in fuel costs as oil prices remain low.

United Airlines also rewards shareholders through buybacks. During 2018, the company repurchased shares worth $1.25billion. In the first nine months of 2019 it has bought back shares with $1.4billion.

The grounding of its Boeing 737 MAX jets have hampered sales less than expected and these jets are expected to remain grounded until June 4, 2020. Should this date come forward then we see this as a positive for the stock

On the negative side, we don’t like the level of debt the company carries. Debt to Equity exceeds 100%. Whilst this is fine in a low interest rate environment, it could become a problem should rates start to rise again.

United Airlines does not currently pay a dividend

The UAL share price has recently come under pressure due to the grounding of the 737 MAX jets and the Wuhan coronavirus. Both are expected to resolve in the next quarter and if this happens UAL will be looking cheap, trading on a forward PE of just 6.51

If these risks abate then we see UAL trading back near its historical PE of 9 which gives it year end 2020 price valuation of $113 – a 45% increase on the current price of $77.63 on January 27th, 2020