After plunging from $89 to $21 as of earlier this month, United Airlines (NYSE:UAL) stock has gone on to stage an impressive rally. As of today, the shares are trading just shy of $33. Other airlines like American (NYSE:AAL), Delta (NYSE:DAL), and Southwest (NYSE:LUV) have also surged recently.
Since the markets had become extremely oversold, it was inevitable that they would undergo an explosive rally
The massive federal stimulus bill and the aggressive actions of the Federal Reserve. also provided much-needed catalysts to the stock market.
Yet despite all this, it’s important to keep things in perspective. First of all, during harsh bear markets, there can be strong rallies. Secondly United still faces many headwinds that could easily lead to more plunges by UAL stock.
The fact is that commercial air travel is likely to remain depressed for some time. According to a recent post in the Wall Street Journal, plans have already been made to shut down most flights in the U.S., as about 80% of the population has been ordered by their states or municipalities to stay at home.
United’s Financial Situation
United has some key advantages , such as its enormous size and its trusted brand. The company has also been able to be quite profitable during the past decade.
It has about $8 billion of liquidity on its balance sheet and about $20 billion of its assets have not been used as collateral.
Based on United’s own analysis, the company would still have $3 billion of liquidity if travel volumes average 20% of their normal levels for the rest of the year.
Moreover, United’s largest investor is Berkshire Hathaway’s (NYSE:BRK-B) Warren Buffett. He’s certainly someone who takes a long-term view of things. He also has enough resources to provide the airlines with the financial support it needs. Of course, during the depths of the financial crisis, Buffett provided many firms, including Bank of America (NYSE:BAC), with financial support.
Something else to consider is that United is poised to get financial assistance from the federal government, as the stimulus bill recently signed into law includes $60 billion of aid for the country’s airlines.
The Bottom Line on UAL Stock
Even after the recent surge of United’s stock, its valuation remains fairly cheap, even if its earnings sink by 50% this year. It is also encouraging that savvy investors are starting to buy the shares. Just look at Altimeter Capital. This investment firm recently scooped up 653,000 shares of UAL stock, bringing its total stake in the company to 12.5 million shares or 5%.
Again, United still faces steep risks. There is also little clarity on how long the virus will last and what its ultimate impact will be on air travel.
In other words, expect the stock to continue to be volatile. However, for long-term investors, United’s shares may be worth averaging into right now, as the company should thrive once everything starts to get back on track.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.