Oil prices are still on the decline, which bodes well for airline stocks like United Continental Holdings Inc (NYSE:UAL), where the cost of jet fuel accounts for a big chunk of its operating budget. And this makes UAL stock even more attractive.
United Continental stock, which is down more than 6% year-to-date, continues to fly under the radar when compared to not only the 4.5% rise in the S&P 500 index, but also the 1.2% decline in the Dow Jones Transportation Average.
Notably, UAL stock lags some of its peers like Southwest Airlines Co (NYSE:LUV), which has returned more than 6% this year. What’s good for Southwest should also be good for United Continental, which has kept its fares steady despite the drop in oil — now below $50 per barrel.
This means in the quarters ahead, United Continental is poised to deliver some robust earnings, especially as the busy summer travel season draws closer. Analysts have begun to connect these dots. In a recent research note, Stifel points out that airlines are now “intrinsically undervalued.”
While raising its price targets on four top airline stocks, including UAL, the analysts noted the following:
“The consensus, longer-term bullish view on airlines is that consolidation, better management teams, improved balance sheets, and capacity discipline will allow the industry to deliver more durable earnings and cash flow which will ultimately lead to airline stocks re-rating to industry multiples.”
Regarding United Continental, Stifel noted that the shares looked cheap. And part of the reason was due to concerns about its merger almost six years ago with Continental, which the analysts agreed wasn’t perfectly executed.
But the story is different now, insists Stifel, who raised its price target on UAL stock from $95 to $125. Shares closed Mar. 27 at $68.37. This means there’s potentially 82% returns to be had.
Bottom Line for UAL Stock
Calling Stifel’s that price target “aggressive” would be an understatement. Although UAL stock has a consensus Buy rating, the average price target is $85, suggesting potential premiums of 24%, which is still an attractive return. So, while investors insist on playing the waiting game with airline stocks, United Continental, which flies to six continents could take off and not look back. And for investors who are looking for a cheap airline stock should get their boarding passes now.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.