For investors seeking big returns on turnaround plays, United Continental Holdings Inc (NYSE:UAL) has to be worth considering. UAL stock crashed last month after the company forcefully dragged a man off a plane to seat its own employees, then completely mismanaged the public relations fallout.
United Continental shares are trading at just 10 times earnings, close to its airline peers like American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL).
Despite the disaster, there remain millions of passengers who are dependent on the airline, who just don’t have many choices. Some hubs, like Denver, are dominated by UAL. Small markets with few flights may offer few flight alternatives.
United, in short, is not going away.
UAL Stock Is a Bargain
United Continental reported earnings on April 17, delivering fully diluted net income of $96 million, 31 cents per share, on revenues of $8.420 billion. Revenue was up 2.7% from a year earlier, although net income was down 69%.
The news disappointed investors, the stock losing about $3 per share, but most of that loss has since been recovered, and UAL stock is now trading mid-way between its $76 per share high for the year and the low of $65 per share achieved in the immediate wake of the scandal.
CEO Oscar Munoz was hired in 2015 to turn the company around, having served on the United board and, before that, Continental Airlines’ board for a decade, while rising to become chief operating officer at CSX Corporation (NASDAQ:CSX), the railroad company.
Despite suffering a heart attack a month into his tenure, which required a heart transplant, Munoz was able to get the company’s on-time performance up to a record level in 2016. The company is operationally sound.
Munoz has been chastened by the March failure, and was denied a promotion to chairman that had been written into his employment contract. The CEO has been punished, and UAL stock has been punished.
Has it been punished enough? That’s what investors like InvestorPlace contributor Josh Enomoto are asking.
United Continental: Inside the Numbers
Financially, UAL is not in bad shape. It has just $11.2 billion in long-term debt on $41.4 billion in assets. It had almost $4.4 billion in cash and short-term securities on its books at the end of March. In 2016, it delivered nearly $6 billion in operating cash flow.
Compare these values with those of American, which was selling at double its price-to-earnings ratio on Apr 24. On its report for the quarter ending in December, American had nearly $22.5 billion of long-term debt on $51.3 billion in assets. Its profit margin, $289 million on revenues of $9.8 billion, was nearly as poor as United, and its next numbers are expected to be in-line.
In short, things could be worse for UAL stock. It has the financial strength to get past its present scandal and stocks subject to scandals like this usually come back in time. It won’t come back immediately, but it most likely will come back.
That is the conclusion of the analysts following the stock, 9 of whom rate it a buy against 8 who call it a hold, with one sitting on overweight.
The Bottom Line on UAL
Stupid on the scale of last month is not usually repeated. At the company’s earnings call last week, analysts seemed anxious to look past the scandal, focusing on the company’s growth initiatives and opportunities.
Of all the major U.S. airlines, UAL is the cheapest right now. If you even believe it can revert to the mean over the next year, the stock is cheap.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.
