Why Did United Airlines Stock Go Up?

United Airlines (NASDAQ:UAL) has been surging in recent months, offering investors hope that the worst may be over for airlines following 2020-21 era disruptions. The most recent uptick in United Airlines share price is largely the result of very favorable Q2 reporting.

With over $1 billion in profits, the company allayed investor concerns over its performance, which stemmed from high rates of flight cancellations early in the summer. The airline also raised its full-year earnings forecast to $11-12 per share, well above the roughly $10 per share previously forecast by analysts.

As a result of this optimistic guidance and strong performance, the market has driven shares of United higher. However, the stock was already riding a strong upward wave before Q2’s earnings came out.

Over the last three months, shares of United Airlines have risen by 29.6 percent. Much of this recovery was due to a normalization of traffic volumes. A generally improving macroeconomic environment also be provided support to United’s rising prices.

Increased Capacity Boost Future Revenue Potential

In the most recent quarterly report, United reported total revenues of $14.2 billion. Quarterly earnings rose to $3.24, while the pre-tax margin was fairly healthy at 15.3 percent. This margin rate showed considerable improvement, as the pre-tax margin over the past 12 months has been 6.7 percent. Return on equity has, however, been far more impressive at over 48 percent.

Source: Pixabay

The company also invested in growth initiatives in Q2, successfully rolling out a new self-service app and introducing new sustainable fuels on flights out of San Francisco. While small improvements, these initiatives follow a general trend of business enhancements at United.

The company has also increased its capacity by 17.5 percent over the past year and can now accommodate more passengers, leading to higher revenue potential.

In the coming 12 months, analysts now expect United’s earnings to rise to about $11.15 per share. Analysts forecast strong double-digit earnings growth from both United and the airline industry as a whole over the next 5 years, suggesting that EPS could go considerably higher.

Consumer demand for United’s flights is also increasing rapidly. Thanks to its newly enlarged capacity, United flew a record number of flights in the last quarter.

Cross-Atlantic flights also reached a new record, topping 2019 levels by 32 percent. If demand remains at current levels, United and its major competitors will likely have no trouble continuing to generate large revenues going forward.

Analysts Forecast UAL Will Hit $73 Per Share

Among 16 analysts, the consensus forecast is for UAL share price to hit $73 per share. Compared to the most recent price of $54.56, this would give the stock an upside of 33.8 percent over the coming 12 months.

Even after its recent run, United Airlines may still be undervalued. The stock trades at just 4.9 times forward earnings and 5.2 times cash flow, both of which are strong signals of potential undervaluation. Even with the higher expected earnings priced in, the stock is trading at a sufficient discount to make it appear quite cheap.

Even a pessimistic analysis seems to support the idea that United Airlines is undervalued. Using the last fiscal year’s earnings of $8.06 per share and assuming zero growth and a 10x P/E multiple, the stock would be worth about $80. Given the considerably higher earnings now expected for the coming years, this number is likely on the low end of United’s valuation range.

High Debt Is a Headwind

One drag on the balance sheet is the company’s high debt load. At 3.5x equity, the airline’s debt could be a major obstacle to earnings growth and overall business performance.

The company’s total liabilities exceed $65 billion, while its assets total just over $73 billion. Of United Airlines’ assets, just slightly over $20 billion is in cash and short-term investments. As such, the company’s balance sheet appears weaker than conservative investors may consider ideal.

Another headwind associated with United Airlines stems from intense competition from other airlines. United is the fourth-largest domestic airline by revenue, slightly behind American, Delta and Southwest.

The airline sector as a whole could also see softer demand as the result of an economic downturn later this year. While forecasts of a recession in 2023 have become less pessimistic, there is still a chance of an economic contraction beginning later in the year. This could dampen consumer air travel, though the effect would likely be a temporary and manageable one.

Is United Airlines a Good Buy?

While United does carry a decent level of financial risk as a result of its large debt load, the company appears to be a good value at today’s prices. Even accounting for the risks posed by United’s balance sheet, current share prices likely offer investors enough of a discount to make the stock worthwhile.

United is also capitalizing on the current demand for air travel by increasing its capacity and creating new tools to improve the passenger experience. These investments may result in rising revenues and earnings in the years to come.

Although United appears very likely to be undervalued, investors may want to keep their stakes in the airline small until it can resolve some of its debt problems. The stock may have considerable upside, but the risks posed by United’s balance sheet are still too large to ignore. Taking on small positions in the stock for the time being may allow investors to take advantage of the possible upside while limiting the risk of losses.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.