Is There A Hidden Opportunity In UAL Stock?

The shares of United Airlines surged 10% in the past week triggered by hopes of a successful vaccine by early next year. We believe that there is a hidden opportunity in United Airlines’ stock (NASDAQ: UAL), which has lost 53% of its value since the beginning of the year and currently trades near $41. The company observed only $2 billion of operating cash outflow for the first nine months primarily supported by the $3 billion grant under the CARES Act. Considering the average daily cash burn rate of $25 million in the fourth quarter, the company’s net debt is likely to increase by another $2 billion in the fourth quarter. Given the positive results released by Pfizer and expectations of an early macroeconomic rebound, the staggering $14 billion drop in the stock’s market capitalization looks unwarranted. Our interactive dashboard highlights United Airlines’ stock performance during the current crisis with that during the 2008 recession.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 60% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how UAL and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

United Airlines vs S&P 500 Performance Over 2007-08 Financial Crisis

UAL stock declined from levels of around $44 in October 2007 (pre-crisis peak) to levels of around $5 in March 2009 (as the markets bottomed out), implying UAL stock lost 89% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $13 in early 2010 – rising by 163% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

United Airlines’ Fundamentals in Recent Years Look Stable

United Airlines’ Revenues grew by 14% from $38 billion in 2015 to $43 billion in 2019, driven by a slow growth in air travel demand. Also, the company’s margins remained relatively flat in mid-single digits due to expanding debt. However, the EPS increased by 71% from $6.77 in 2016 to $11.63 in 2019, due to lower shares outstanding. In Q3, the company’s revenues fell by 78% (y-o-y) as the capacity (ASMs) dropped by 70% and the passenger load factor plummeted to 48%.

Does United Airlines Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

United Airlines’ total debt increased from $11 billion in 2016 to $26 billion at the end of Q3 2020, while its total cash increased from $4.9 billion to $13 billion over the same period. In a historic move, the company raised $6.8 billion in debt during the second quarter secured by MileagePlus Holdings, the assets under its loyalty program. Considering a daily cash burn rate of $25 million, the company can weather the crisis for more than a year.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Another round of payroll support for the airline industry, a sizable reduction in cash burn rate, and the launch of a successful vaccine are the key triggers for an upside in United Airlines’ stock.

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