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United Continental Upside Analysis Before Earnings

|Includes: AAL, ALK, DAL, LUV, United Continental Holdings, Inc (UAL)


United Continental Holdings (NASDAQ:UAL) is expected to report earnings next Tuesday after the market closes. The company's shares last traded at $75.04 early Thursday morning, approximately 98% of its 52 week high. Although the stock is near its high, fair value data implies that shares are still 18% undervalued while Wall Street's consensus price target of $84.28 implies 12% upside.

Comparable Company Analysis

Return on Invested Capital (NASDAQ:ROIC) is used to evaluate the ability of the company to create value for all its stakeholders, debt and equity.

ROIC = NOPAT / Average Invested Capital

NOPAT is defined as Net Operating Profit After Tax and Average Invested Capital is the average Debt + Equity over the same time period.

United's ROIC does not look highly attractive when compared to its publicly traded peer group: Alaska Air Group, Inc. (NYSE:ALK), Delta Air Lines, Inc. (NYSE:DAL), Southwest Airlines Co. (NYSE:LUV) and American Airlines Group Inc. (NASDAQ:AAL).

The company's ROIC of 13.3% is slightly above AAL (13.1%) and below ALK (20.6%), DAL (23.8%), and LUV (21.2%).

These return figures, in part, help explain why the company's EBITDA multiples trade at a discount to this same comparable company group.

United's forward EBITDA multiple of 4.1x is well below all of its peers: ALK (5.6x), DAL (4.7x), LUV (6.1x), and AAL (4.8x).

However, note how the airline's returns have generally improved since its 2008 low of -30%. Compare this to United's fiscal year 2015 ROIC of 18% - a big improvement!

The company's financial performance has improved over the last several years and is expected to continue improving.

When inputting consensus Wall Street projections into's various discounted cash flow (NYSE:DCF) analyses and comparable company models, United appears to be fundamentally undervalued.

The chart below compares our calculated margin of safety for each peer company vs Wall Street's.

Note how Wall Street's generally bullish on this entire airline group. However, our unbiased analyses concludes that only United and American Airlines are materially undervalued.

Furthermore, just this morning S&P Capital IQ reiterated its Buy rating on United and noted its positive fundamental outlook on the US airline industry. The research firm believes that, "valuations across the group are likely to expand in '17, on better unit revenue performance."

But which stock's valuation is positioned to improve the most?

Investors may want to take a closer look at United prior to earnings.