December 2, 2021

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United Airlines Will Reach New Heights as Covid-19 Loosens Its Grip

[Editor’s Note: This article was updated on May 18 to correct operating income figures for United Airlines.]

United Airlines (NASDAQ:UAL) stock has not been doing well over the past few months. Share prices are down almost 70% for the Chicago-based airline, and it’s no surprise. The novel coronavirus spread like wildfire in the U.S., and the airline industry suffered the brunt as a result. And despite the easing of restrictions, passenger volumes have not recovered.

UAL Stock Will Reach New Heights as Covid-19 Loosens Grip

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Data from Airlines for America show that the largest airlines averaged 23 passengers on each domestic flight over the last seven days. These are not high numbers, so you can hardly criticize investors like Warren Buffet, who decided to exit from the airline industry completely.

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At the virtual annual general meeting for Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), Buffet said: “Berkshire is worth less today because I took that position than if I hadn’t.” Unusual words for a man who is always an optimist. But it’s also what many long-term investors in airlines may be thinking at this point.

However, not every airline is alike; there are some like United Airlines that have acquitted themselves well in the current crisis. Although we would stop short of saying that the stock is virus-proof, it’s safe to assume it has significant upside for the long-term investor.

Rough Start

The first quarter of the current fiscal year was not a good one for United Airlines. Revenue declined to $8 billion from $10.8 billion in the fourth quarter of fiscal 2019. The company recorded a net loss of $1.7 billion for the quarter, a sharp contrast to $292 million in net profit the airline registered over the same period last year.

The figures were worse than analyst expectations. And it’s going to get uglier in upcoming quarters.

For the second and third quarters, analysts are predicting earnings per share will slide to losses of $9.73 and $5.8, respectively. On an annual basis, analyst estimates show EPS will be down $18.79. On the bright side, the same projections show the airliner will report a positive EPS by 2021 of $1.5 per share.

Although the earnings report is nothing to write home about, it’s not extraordinarily bad. An extended lockdown and travel restrictions have all but eroded any chance of profitability for airlines. However, the silver lining is that once demand resurfaces, companies that were nicely progressing will get the inevitable bump in the stock market.

In short, expect a bounceback from UAL stock once the crisis is over.

Stable liquidity position

What most investors are interested in these days is liquidity, i.e., does a company have the legs to survive this crisis? In that respect, United is in a better position than its peers. Liquidity is mostly under control at the end of the latest quarter, with cash, cash equivalents, marketable securities coming to $5.221 billion.

The calculation does not include the $2.5 billion the company will get as part of the Payroll Support Program (PSP) of the CARES Act. In its latest investor presentation, the company outlined that it will burn through $40-$45 million daily in the second quarter. Even if that were true, liquidity metrics for the company would not be negatively affected as a result of these expenses.

UAL Stock Valuation

Analyst data collected from Refinitiv shows a 12-month price target of $36.30 per share, a 59.5% upside to the current share price of the company. In doing some of our calculations, let’s assume that the company manages to return to pre-2020 levels by 2023 or later. That would mean the company was sitting on an operating income of $4.5 billion. If you take that and then subtract interest and taxes, you would be left with around $2.9 billion give or take. Assuming full dilution of stock issued to the government and recent share sale, you would be sitting at an EPS of $9.44 per share.

Now, of course, these are some healthy assumptions. But if numbers do return to pre-crisis levels, it’s not out of the realm of possibility that investors would be willing to pay ten times for these earnings. In that case, you could be looking at a per-share price of $94.4, but that is very ambitious. With half the world still in lockdown mode, one can’t be that optimistic. But my assumptions are not extraordinary by any stretch as well.

Deleverage, Please

Although the stimulus package and its own expenditure cuts will provide breathing room, United needs to deleverage its balance sheet. Shareholders need to have more skin in the game and the recent share issue should help in that regard. But still, the company is highly leveraged. What’s more worrying is that there is always the propensity to load up on debt when operations are in trouble.

Company Current Price Current Ratio Quick Ratio Debt-to-Equity PE Ratio American Airlines Group Inc 19.05 0.45 0.35 -283.42 5 Delta Air Lines Inc 46.13 0.41 0.35 1.12 6.3 Southwest Airlines Co 46.19 0.67 0.61 0.41 10.79 United Airlines Holdings Inc 61.59 0.55 0.48 1.77 5.3

As the table above shows, United Airlines is not in as bad of a position as American Airlines (NASDAQ:AAL) but Southwest Airlines (NYSE:LUV) is clearly ahead in terms of liquidity.

Last Call on UAL Stock

UAL stock will eventually rise and erode its losses. That’s not a bold prediction. But I believe the stock has long-term value and significant upside.

It has rock-solid liquidity to survive this crisis and the stock offers an attractive entry point as it’s trading at historic lows. The only thing the company needs to watch out for is long-term debt. If the numbers do not improve there, investors may be tempted to look elsewhere for greater safety. Other than that, you are in for smooth sailing with United Airline’s stock.

As of this writing, Faizan Farooque did not hold a position in any of the securities mentioned above.

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