Although United Continental Holdings Inc (NYSE:UAL) earnings weren’t hurt by another public relations debacle, United stock just isn’t a safe bet. The company again finds itself suffering from negative press after a dog died in one of its overhead compartments.
Despite dilemmas such as these, its financial performance remains strong. It has beaten earnings estimates over the last few quarters. Moreover, with the stock rising 22-fold since 2009, low multiples, and high earnings growth predicted, one might be inclined to ignore the bad press.
However, given the UAL’s performance in comparison to peers, this earnings beat is not enough reason to buy United stock, especially when you can get better stocks with way less risk.
Earnings Beat Can’t Help Poor Public Image
The company reported a profit of 50 cents per share. A profit of 40 cents per share came in for the same quarter last year. Consensus revenue estimates stand at a little more than $8.96 billion for the same quarter, an increase of $540 million over last year’s quarterly revenue of $8.42 billion.
However, investors should expect non-financial press to dominate UAL headlines. Perhaps no U.S.-based carrier has dealt with more embarrassing press than has UAL.
Even so-called “legacy” carriers such as American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL) have not come under this degree of fire. The latest debacle came as a pet died in one of its overhead compartments.
United’s image has also suffered from other incidents such as reports of the passenger who was injured after refusing to allow United to bump him last year. Also, the song “United Breaks Guitars,” which has attracted over 18 million views on YouTube to date, serves as a continuing reminder of UAL’s reputation for poor customer service.
Still, United Airlines Stock Benefits from High Profit Growth
However, analysts should not confuse a public relations image with data. Contrary to popular belief, the airline continues to increase passenger loads. Its latest monthly report showed a 6.5% increase in passenger loads in March.
Also, the stock trades at around $67 per share. That represents quite a comeback for a stock that had fallen as low as $3 per share in 2009. Despite this massive increase, United Airlines stock trades at a price-to-earnings (PE) ratio of 8.9. Both AAL and DAL have multiples closer to 10 currently.
The prospects for growth also appear favorable. The company has seen stagnant revenue growth for many years. United Airlines stock enjoyed increased profits after the company cut its cost of revenue by $6 billion in 2015. With revenue growth improving, analysts expect further earnings increases.
After earning $6.76 per share in 2017, analysts forecast $7.82 per share in 2018 and $9.44 per share in 2019.
United Airlines Stock Won’t Outperform Peers
The problem for would-be buyers of United Airlines stock is that its peers enjoy the same level of growth.
And if old-line carriers such as American and Delta see these kinds of profit increases, younger, more nimble airlines such as Southwest Airlines Co (NYSE:LUV), JetBlue Airways Corporation (NASDAQ:JBLU), and Spirit Airlines Incorporated (NYSE:SAVE) also benefit from these growth levels.
Moreover, the industry’s reputation for low profits persists. Fears that massive losses could return also keeps multiples low. For these reasons, airline-related funds could serve as a safer play.
The Fidelity Select Portfolios Air Transportation Portfolio (MUTF:FSAIX) or the ETF S Solutions/U S Glb Jets ETF (NYSEARCA:JETS) are among the choices invested mostly in air transport. Buyers of the fund would also see dividend distributions, a benefit not currently offered by United Airlines stock. If one prefers an individual stock, SAVE currently produces the highest level of overall profit growth.
The Bottom Line on United Airlines Stock
Although robust financials stands in contrast to its poor public image, investors still should avoid United Airlines stock. If one looks only at UAL’s financials, they might be inclined to buy the equity. A low PE, high profit growth, and a record of beating estimates might lead investors into UAL stock.
However, most of its peers are reporting comparable or better numbers. For this reason, investors might see better returns in a mutual fund or ETF tied to airlines. They could also look at Spirit Airlines, which currently enjoys the highest growth in the industry.
Hence, despite strong numbers and a likely earnings beat coming, investors will likely do better by onboarding other airline-related investments.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.