United Airlines Stock Looks Fairly Valued But Obstacles Remain

UAL: United Airlines Holdings logo
United Airlines Holdings

With the progress in mass vaccination, passenger numbers at TSA checkpoints have observed a strong uptick in the past two months. United Airlines (NASDAQ: UAL) along with its peers, American and Delta, have revised their full-year outlook with a likelihood of positive cash generation in summer. Assisted by the government’s payroll support program, United reported just $4 billion of operating cash outflow in 2020 – fairly lower than the $6.5 billion drop in the stock’s market capitalization. Positive sentiment surrounding a quicker than anticipated recovery in travel demand has pushed UAL stock from $40 in early January to $58 at present. However, the risks associated with a fourth wave of the pandemic triggered by new virus strains remains a concern. Thus, Trefis believes that the stock is fairly valued and highlights quarterly trends in revenues and earnings in an interactive dashboard, United Airlines Earnings Preview.

United Airlines has $27 billion of debt and $11 billion of cash on the balance sheet

In a historic move, United Airlines raised $6.8 billion of long-term debt in July 2020 by collateralizing its loyalty program assets. Subsequently, the company raised capital through multiple debt and equity offerings to support its large daily cash burn figures. However, the government launched the second round of payroll support in January 2021 due to continued slump in air travel demand and again limited operating losses. Thus, the company holds a bulk of its long-term debt as short-term investments due to stringent capital preservation measures including capex curtailments and dividend suspension. In conformity with PSP-2 requirements, the company has suspended dividends and share-repurchases until March 2022 and investors can only benefit from capital gains as travel demand recovers.

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How has UAL stock fared in comparison to the S&P 500?

UAL stock declined from levels of around $80 in February 2020 (pre-crisis peak) to levels of around $21 in March 2020 (as the markets bottomed out), implying UAL stock lost 74% from its approximate pre-crisis peak. With the easing of restriction measures, the stock has more than doubled to $58, but the newly imposed lockdown in Europe and prevalence of U.K. strain across the world are a concern for the travel industry. Thus, the stock is likely to observe headwinds in the near term.

The coronavirus pandemic has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for FedEx vs. Quest Diagnostics shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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