Can Airlines be a good bet right now? Most might shy away due to extrinsic risks, increased leverage, and reduced travel demand. But there are some situations which can be a good bet. Take United Airlines (NYSE:UAL) for example. Covid-19 related demand slump aside, looking at the underlying fundamentals and peer comparison suggest that United Airlines was trading cheaply at the end of 2019. Its stock has only gotten cheaper since then, and it is only a matter of time before the demand rebounds completely. Our dashboard United Airlines Is Trading Cheap briefly summarizes why United could be a good buy opportunity. To cut a long story short, despite showing consistent growth and relatively higher profitability compared to peers, the stock has been trading at a lower multiple. There could be returns in store if the market recognizes this mis-pricing. And this is on top of the stock rebound we might see simply because of travel demand returning.
So why do we say United could be trading cheap, thus presenting a buying opportunity? There are 3 reasons. First, At the end of 2019, United’s stock was trading at $88, which is almost 2.5 times the current market price (as of Aug 17 2020). That’s almost a 60% lower price right there despite the expectation that air travel is an essential service which is likely to rebound fully once the pandemic impact wanes. Second, at the end of 2019, United’s stock price implied a trailing EV/EBITDA multiple of 6.1, which was almost 7%-8% lower than a year before. Compared to United, its peers AAL, LUV, and SKYW were trading at a significantly higher multiples of 6.6, 7.5, and 7, respectively. If we take profitable players and look at EV/EBITDA of the entire industry, we find United again lagging behind – 6.1 for United vs 6.54 for the industry. Third, this lower multiple is despite consistent revenue growth (~ 18% between 2016 and 2019) and relatively higher operating margins. United’s operating margin in 2019 stood at 8.8% vs just 6.9% for Alaska, and 6.7% for American. Southwest and Delta had higher operating margins.
Considering the above, we think that as demand rebounds, United Airlines is likely to give good returns to investors. This holds especially in the context of the extent of the price decline we have seen this year.
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So, United Airlines might give good returns from current levels. But, what if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with 170% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.