United Airlines: Soaring To New Heights

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About: United Airlines Holdings, Inc. (UAL)
by: Stone Fox Capital
Summary

United Airlines continues to survive and thrive despite the volatile oil markets.

The airline remains on track to hit 2020 EPS targets between $11 and $13.

The stock trades far below P/E multiples of other transport stocks despite faster revenue growth.

Even a below transport sector multiple of 10x '20 EPS targets yields a $123 price target.

No matter where oil heads, United Airlines (UAL) is positioned to thrive. The market continues to look past a recent history of the airline surviving and thriving volatile oil prices providing a stock that is still extremely cheap despite a double from the 2016 lows.

Image Source: United Airlines website

Oil Volatility

Most investors understand that oil prices have a large impact on the bottom line of airlines. Though, the market places too much emphasis on the impact these days.

In Q1, United Airlines survived and even thrived under oil prices that were highly volatile since the start of 2018. The airline even paid $58 million in additional fuel expenses YoY, yet the company blew away EPS estimates as revenue surged over $500 million in the period.

Source: United Airlines Q1'19 presentation

The fuel expenses will rise and fall and cause havoc for airlines like United with ~22% of expenses tied to fuel, but the airline sector is much more tied into adjusting fares along with the overall cost structure now. As one can see from the Brent crude chart over the last 5 years, prices have been a lot lower over this period than $65/bbl. In fact, the price has hardly been this high since the crash.

Chart Data by YCharts

Yet, United Airlines just reported a quarter where pre-tax margins doubled to 4.1%, up from only 2.0% last Q1. Previously, the airline had a history of negative operating margins in Q1.

The airline is so bullish on the future that the company is forecasting earnings of $11 per share in 2019 and $12 in 2020. United Airlines only trades at $90 now and simple math suggests the airline stock doesn't trade based on those projections.

Chart Data by YCharts

Overlooked Sector

The market is still looking past the profitability, consistency, and growth of the airline sector. Other transportation stocks like CSX Corp. (CSX) and United Parcel Service (UPS) still trade at substantially higher forward P/E multiples.

Chart Data by YCharts

The odd part is that United Airlines is forecast to grow at faster clips than the other transport stocks. Typically, the faster growing company trades at the higher valuation multiples.

All 3 of these transport stocks are positioned to grow revenues in the 2% to 6% range over the next couple of years. The issue is that United Airlines is forecast to top the growth rates at 5.9% in 2020 while CSX is at the bottom of the scales at 2.3% in 2019.

If United Airlines traded at the same forward P/E multiples of these other transports, the stock would have the following stock prices based on the $12.29 analyst EPS forecast for 2020:

  • CSX 16.34 P/E multiple = $200.82
  • UPS 12.59 P/E multiple = $154.73

The logic that airline stocks and United Airlines in particular trades at such low multiples no longer holds up. For this reason, as the stock breaks strong resistance at $90, a substantial upside move could occur. The old high near $98 appears like a small step to top $100 and beyond.

Takeaway

The key investor takeaway is that United Airlines remains a clear bargain. Volatile oil prices could easily hit the short-term EPS targets and the stock would still be cheap while the long-term numbers will continue an upward trend.

The airline stocks remain long-term holdings until the market actually rewards them with market multiple valuations. In the process, United Airlines will soar to new highs.

Disclosure: I am/we are long UAL. 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.