United Airlines: One Airline To Avoid Or Not?

| About: United Continental (UAL)

Summary

United Airlines missed Q4 estimates despite substantially lower fuel costs.

The earnings call was highlighted by the surprise attendance of the new CEO out on a leave of absence.

The stock is incredibly cheap for an airline with record profits and an aggressive buyback plan.

When the media reports the best news from a quarterly earnings call is that the CEO surprisingly attended after open heart surgery, the company has issues. In the case of United Airlines (NYSE:UAL), the airline missed estimates by a smashing $0.05 despite a historic reductions in the highest cost from last year.

Whether due to the CEO health issues or the primary hub in the energy-impacted Houston market, the stock has been smacked down this year. The stock is down from $60 in the last month alone. Though the company missed Q4 estimates and guided to mediocre Q1 margins, United Airlines still reported record Q4 profits.

Is now really the time to avoid UAL?

Worst Legacy Airline

After missing EPS estimates for the second straight quarter, the market can easily label United Airlines as the worst legacy airline. The Q1 forecasts weren't much better. The pre-tax margin of 10% on the high side is far below the at least 18% forecast from Delta Air Lines (NYSE:DAL). As well, United sees PRASM down at least 6% and up to 8%.

The numbers are pretty brutal considering the largest cost item from last Q4 was down a whopping 36% for the last quarter in 2015. United saved over $900 million on fuel and still managed to disappoint the market in a big way.

The story though changes when one starts digging into the details. Though I've been bullish on airlines for a while now due to a changing culture in the industry and cheap valuations, United has always been on the outside looking in as far as top appeal in the sector.

When reviewing the details, one quickly realizes that United only trades at 6x EPS estimates. To put it in real terms, the airline is forecast to earn $17.52 per share when combining the 2016 and 2017 EPS estimates. The airline only trades for $47 now. This compares very favorably to the P/E multiples for Delta and American Airlines Group (NASDAQ:AAL).

UAL PE Ratio (Forward 1y) Chart

Incredible Buybacks

So not only is the airline cheap and making operational improvements including the flight shift towards out-and-back flying from the hub, but United is loading up on the stock.

United's management made the incredible revelation that the airline was aggressively buying during the panic to start January. Due to filing a 10b5-1 plan, United was buying stock every day with a goal of spending at least $750 million this quarter.

For perspective, the airline is only worth $17.5 billion now. United would repurchase 4.3% of the outstanding stock at that rate in one quarter alone. Such a move would increase 2016 EPS estimates by roughly an equal amount since the buybacks are taking place so soon into the new year. This doesn't even factor in more buybacks in the remaining three quarters of 2016.

Even without the new spending, United spent $520 million during Q4 and $1.2 billion for 2015. At the predicted Q1 buyback level, the airline will actually approach a 10% buyback yield with roughly $1.7 billion spent in the last four quarters. Without a dividend, the net payout yield is the same attractive 10%.

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Takeaway

The moral of the story is that sector matters as much as execution. United might not be the best in the industry, but the cheap valuation and the cash generation make the current valuation impossible to ignore. When a company trades at 6x earnings while generating record profits and buying stock like crazy, it probably isn't the right time to dump the stock. Not to mention, maybe the new CEO can improve the margins as his health scare is now over.

Disclosure: I am/we are long AAL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.