Unlike a name such as Boeing (NYSE:BA), United Airlines (NYSE:UAL) stock hasn’t been a rocket ship over the past two months. That said, it hasn’t been a total dud either, particularly as United Airlines stock flirts with a possible breakout.
With that in mind, there may be a few investors who feel that they’ve missed their chance in United. That’s not the case, and in fact, here are three reasons investors can justify a long position in UAL stock.
UAL Stock Valuation
Shares of United are quite cheap — as is most of the sector. Based on current estimates for this year (fiscal 2019), United Airlines stock trades at just 7.3 times forward earnings. When we previously compared UAL to Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV) and American Air (NYSE:AAL), it was one of the cheapest names on a price-to-earnings (P/E) ratio basis.
On a PEG basis — which measures the price-to-earnings ratio against growth — United Airlines stock was cheaper than its peers by a long shot. That remains true today as well. Thanks to its growth profile, which we’ll discuss in a moment, the valuation remains very discounted to the overall market.
A cheap valuation is good, but it shouldn’t be the sole catalyst to buying a stock, in my humble opinion. A low valuation is like a cherry on top of a sundae. So long as a few other boxes are checked, a low valuation can let the stock rally once other catalysts start to line up.
With all that said, it would be more encouraging if UAL stock paid a dividend like many of its peers. For instance, DAL stock pays out almost 3% annually.
Growth for United Airlines
Analysts currently expect 4.8% revenue growth this year and 6% revenue growth in fiscal 2020. On the earnings front, analysts expect earnings to explode 25.5% this year to $11.46 per share. That’s helped to drive down its P/E ratio and will make rallying an easier process should shares breakout.
For 2020, estimates call for just 6% earnings growth. However, it’s worth mentioning that in the summer, analysts were expecting 5.4% sales growth for 2019 (now expecting 4.8%), but they were looking for earnings growth of “just” 18%. So current expectations of 25.5% is vastly ahead of the prior outlook. Further, it underscores the margin expansion we should see UAL this year.
The airlines have become very profitable and fluctuating oil prices have helped at times. When oil prices are under pressure, as they were in the fourth quarter, companies like UAL have an opportunity to lock in low prices. That said, I’m impressed with how well United Airlines stock has held up so far this year, despite the strong rally in oil prices last month.
The United Airlines Stock Breakout
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United Airlines stock is now above all of its major moving averages and knocking on the $90 breakout level. I love the fact that it has put in a series of higher lows (purple arrows) and continues to ride uptrend support higher (blue line).
After testing $90 resistance earlier this month, shares pulled back slightly and found support at the 100-day moving average. That’s increasing the likelihood that it will be able to break out through $90. It would be a red flag if UAL stock fails to pierce this mark while also falling below uptrend support. Should it lose the 100-day moving average, the United Airlines stock breakout will be on hold.
Should UAL stock breakthrough $90, I want to see that it can get through uptrend/channel resistance. This may come into play around $92. Provided that it can, the recent high near $98 will be on the table. It helps that UAL has the wind at its back after a strong fourth-quarter earnings results in mid-January.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
