The dramatic plunge in airline traffic is at frightening levels, and as the major nations lock nearly everything down to stem the spread of the novel coronavirus, airline stocks will continue to underperform considerably. Even though United Airlines (NASDAQ:UAL) is bleeding cash daily, the losses will continue as schedule cuts remain. If the airline business is so bad, why should investors consider buying UAL stock?

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Anyone investing in United Airlines is betting that the company will navigate through the current turmoil. As it survives in the near-term, the stock will see better days ahead once the business returns to normal flight volumes. It will take at least six months to a year before business picks up.

UAL pulled 10% of its Canadian and American flights for the month. International flights will fall by 20%.

It suspended flights between the U.S. and each of Beijing, Chengdu, Shanghai, and Hong Kong through April 30. A cut to its other trans-Pacific routes will reduce its 2020 planned capacity further. In the near-term, UAL stock will face selling pressure as more routes are cut and capacity is reduced.

One glimmer of upside is the plunge in oil prices. The lower fuel prices, along with other cost savings, will minimize the damage to its first quarter. Despite lower energy costs, analysts expect first-quarter losses of 54 cents a share (per Tipranks).

At a debt-to-equity of 1.29 times, United Airlines need not concern itself with the debt expenses. The federal government is providing billions of dollars worth of loans. This will sustain UAL’s cash flow so that it may continue to operate. It may pay staff and cover operating costs for the next few months.

Outlook on UAL Stock

UAL reached its 2020 earnings per share goal one year ahead of schedule. By earning $11.58 a share, it met its EPS target of $11.00 to $13.00. But this year, a sharp drop in travel volumes may persist long after borders reopen and tourism recovers.

Chances are high that wary travelers will avoid the airline for at least a year. Consumers and businesses may wait and see how the infection rate plays out once countries contain it.

A few weeks ago, investors may have bet that the COVID-19 spread would peak and then fall to manageable levels by the middle of May. Yet with mounting casualties in the U.S. and the increasing virus spreads across the U.S., no one knows when the outbreak will end. Investors buying UAL stock today are only guessing that business will eventually return.

Still, assuming a best-case scenario of flight volumes improving next month. This suggests that in 2022, Southwest may earn $15 – $18 a share. And by $2022, its adjusted free cash flow could top over $2 billion.

Valuation and Your Takeaway

In a 5-year discounted cash flow model, assume the following revenue growth:

Data courtesy of finbox.io

At a discount rate of 7%, UAL stock is worth $30.26. On Stock Rover, the site calculated a margin of safety of over 200%. This implies a fair value of $69.55.

Source: Here are the charts. Disclaimer is Data courtesy of Stock Rover

The stock is approaching strong seasonality in May. This bullish pattern repeats itself in September through to November.

By then, air travel volumes may improve. Investors should not rush into buying United Airlines but each bigger drop represents a better entry point.

Source: Data courtesy of Stock Rover

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.