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Grounded for Now, UAL Stock Could Take Flight in the Summer

As the novel coronavirus outbreak has spread across the globe, air travel demand has fallen off a cliff, both by choice and by force. United Airlines (NYSE:UAL) has taken a nose-dive with UAL  stock has fallen 70% in the wake of the coronavirus crisis.

Grounded for Now, UAL Stock Could Take Flight in the Summer
Source: travelview / Shutterstock.com

It’s safe to say that airline stocks everywhere have been grounded.

It may seem like a doomsday scenario for United Airlines and the other three big U.S. airliners: Delta (NYSE:DAL), American (NYSE:AAL), and Southwest (NYSE:LUV). In many respects, it is. Air travel demand has come to a screeching halt. Revenues, profits, and cash flows at all of these companies will tank over the next few months.

But, this is a temporary doomsday scenario.

By 2021, COVID-19 will likely be contained, air travel demand will rebound, and revenues, profits, and cash flows will rebound to healthy levels.

In the meantime, while the damage will be severe in 2020, many airliners have amassed sufficient liquidity to withstand the damage without leading to insolvency. The U.S. government also seems keen to step in and help the industry avoid bankruptcy.

All in all, then, United Airlines will survive this doomsday scenario, and come through the other side in 2021 with a fairly healthy business. Ultimately, that means UAL stock — which presently trades at a valuation which prices in a high chance of insolvency — could fly higher in the back-half of 2020.

Air Travel Demand will Rebound

When it comes to the coronavirus crisis impacting the airline industry, there are two important truths to note.

First, while COVID-19 is a big, scary, and volatile thing that won’t go away overnight, it is a temporary headwind. That is, like all other epidemics and pandemics before it, this too shall pass. Indeed, my modeling suggests that — so long as the world continues to practice strict social distancing — “peak coronavirus” will happen in April or May. The virus, and hysteria related to the virus, should fade by summer.

Second, once the outbreak is under control and consumer hysteria fades, air travel demand will bounce back rather quickly. That’s because air travel has become an essential part of the consumer and corporate life. You fly to go see grandma, you fly to New York for a conference, and you fly to the Caribbean for a family vacation. Flying today is less of a “discretionary expenditure” than it was a few years, or a few decades, back.

Plus, even when flying was more of a discretionary expenditure back in 2001 (during the Sept. 11th attacks) or in 2008 (during the Financial Crisis), air travel demand only took a hit for a year or two, before rebounding swiftly.

The same dynamic will play out this time around. COVID-19 fears will kill airline demand in 2020. Easing of those fears will spark a rebound in 2021. Most airline operators will consequently report 2021 numbers that look a lot like their 2019 numbers.

That’s great news for United. The company reported about $12 in adjusted profits per share in 2019. I think that $10 in earnings per share is totally doable in 2021. The stock normally trades at 7.5-times forward earnings. Applying that average multiple to a reasonable 2021 profit projection, you arrive at a 2020 price target for UAL stock of $75.

That’s more than double the current stock price.

United Can Survive

The bigger question surrounding United isn’t whether or not airline demand will rebound in 2021 — it’s whether or not United can weather the storm in 2020.

I think they can.

The airline industry has been largely profitable for the past decade, the longest streak of profitability ever for the industry. During this record-long profitability streak, United built up ample resources to help fight against a crisis like this. For example, United today has $8 billion in liquidity alongside $20 billion in unencumbered assets.

That’s as much liquidity and borrowing power as the company has had… ever.

And, according to management, even in a worst-case scenario where revenues essentially collapse by 20% or more in every single month for the rest of the year, United will still maintain liquidity levels north of $3 billion (which is what management considers the necessary amount to run the airline).

In other words, United appears to have what it takes on its balance sheet to keep the lights on in 2020 while air travel demand plummets. Even if they don’t, the U.S. government appears more than willing to help out in a big way, with U.S. President Donald Trump recently saying: “We’re going to back the airlines 100%.”

All in all, then, insolvency does not appear to a significant risk for United in 2020.

Bottom Line on UAL Stock

United Airlines stock is trading like bankruptcy is imminent, and/or that air travel demand won’t rebound in 2021. But, at present, neither of those things seem likely. United has enough liquidity and unencumbered assets to keep the lights on in 2020, and history shows that air travel demand should recover as soon as the virus fades (which will almost certainly be before 2021).

Net net, UAL stock — while still exceptionally risky and grounded for the time being — could be a big winner in the second half of 2020 as coronavirus concerns fade.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.  As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/ual-stock-take-flight-summer/.

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