Reasons to Like UAL Stock
Footage of the company forcefully dragging a man off a plane to seat its own employees spread like wildfire. And United fanned the flames by completely mismanaging the public relations aspect of the incident. Critics quickly boasted about how Warren Buffett may be regretting his decision to aggressively build big stakes in airline stocks.
But the Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) chairman and CEO is the doing having the last laugh.
After the bloodied passenger video sent UAL stock plummeting by nearly $1 billion to under $70 per share, United has risen 7% and 9% over the respective one month and three months. And given that the UAL stock is still priced attractively at 10 times earnings, which is inline with airline peers American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc.(NYSE:DAL), UAL can still fly higher.
And the biggest winner will be Buffett, who became the company’s largest shareholder last year after amassing 28.95 million of shares to bring his total stake to 9.2% percent of the company.
That bold move, which was partly influenced by reduced competition in the industry following a series of mega-mergers, is still paying off. The market is realizing what Buffett figured out more than a year ago: Millions of passengers will remain dependent on the airline. And thanks to recent consolidation, passengers have fewer airline choices to pick from. This explains why Buffett, who’s known for valuing monopolies, also became one of the largest investors in American, Delta and Southwest Airlines Co (NYSE:LUV).
United has been one of the biggest beneficiaries of the recent consolidation. In the most recent quarter, the company posted fully diluted net income of $96 million, 31 cents per share, on revenues of $8.4 billion. Revenue was up 2.7% year over year. And adjusted EPS topped Wall Street’s estimates by 3 cents. As with its peers, UAL is benefiting from fewer unsold seats and an ability to charge for checked bags and other amenities that were once free.
Notably, immediately after the passenger scandal emerged, United issued a second-quarter forecast that calls for up to 3% revenue growth, which immediately told investors that the company doesn’t expect the scandal impact its performance. Furthermore, United guided for pre-tax operating margins of 10% to 12%, which at the midpoint, was above Street estimates. Not to mention, it’s a confident guide, especially after the company took a 5% charge in costs excluding fuel and profit sharing.
Bottom Line for United
With almost $4.4 billion in cash and short-term securities and another $6 billion in operating cash flow, which is superior to several peers, UAL stock has all of the qualities investors should look for in a turnaround candidate. And it doesn’t hurt to have an endorsement from Warren Buffett keeping a floor on the shares.
And although the entry point is not as attractive as it was immediately after the scandal broke, United could reach $95 to $100 in the next 12 to 18 months, delivering 17% returns.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
