Odds In Favor Of United Airlines Stock?

+9.57%
Upside
43.33
Market
47.48
Trefis
UAL: United Airlines Holdings logo
UAL
United Airlines Holdings

The sharp rise in benchmark oil prices since January has been weighing on airline stocks as fuel costs account for almost one quarter of total operating expenses. Per annual filings, United Airlines (NASDAQ: UAL) does not have fuel hedges to shield itself from short-term price fluctuations. In 2013, the company registered an operating profit margin of 3% and generated positive cash despite the WTI benchmark reaching $100/bbl. Thus, the stock’s $10 billion contraction in market capitalization looks overdone as the company incurred $4.5 billion of operating cash burn over the last two years and passenger demand runs strong. Our interactive dashboard on United Airlines valuation highlights the historical trends in revenues, earnings, valuation multiple, and forecast for FY2022.

Before the pandemic, United Airlines’ revenues observed an average growth rate of 6% p.a. from $36.5 billion in 2016 to $43.3 billion in 2019. The company earns its revenues from the sale of air tickets and other ancillary services such as cargo and the sale of loyalty points. Top line expansion is driven by continued capacity growth and improving fares. Moreover, the company’s net margins have remained relatively flat within the 5-7% range with an almost 2x change in earnings per share as the company spent significantly in buying-back common stock.

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Passenger and Air Cargo Demand Remains Strong

In recent months, investors have been optimistic on Atlas Air (NASDAQ: AAWW) and Allegiant Travel Company (NASDAQ: ALGT) despite concerns of spiking inflation, supply chain disruptions, and imminent impact of Russia-Ukraine war on the global economy. Atlas Air provides leased aircraft & aviation operating services and Allegiant Travel Company is a passenger carrier that focuses on under-served U.S. cities. Atlas Air stock has more than doubled and Allegiant stock is down by just 5% from pre-pandemic levels assisted by air freight and domestic passenger demand, respectively.

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 Returns Mar 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 UAL Return -5% -4% -42%
 S&P 500 Return 3% -5% 101%
 Trefis MS Portfolio Return 3% -7% 264%

[1] Month-to-date and year-to-date as of 3/23/2022
[2] Cumulative total returns since the end of 2016

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