After Berkshire Hathaway (NYSE:BRK.B) conceded that the airline industry would not offer great returns, some investors might want to exit the sector, too. Yet airlines trade at steep discounts, which might be enough to offset weak demand for flights for the rest of 2020. United Airlines (NASDAQ:UAL) stock is one of several airline names that value investors may still want to consider.
UAL stock already reflects the impact of demand cuts. Still, investors continue to try to anticipate when demand for air travel will recover.
Steep Cost Cuts
United Airlines cut its May and June schedule by 90%. It also suspended merit pay increases and implemented a hiring freeze. Additionally, the airlines has cut its spending on vendors and third-parties and reduced the base salaries of all of its executives by 50%. Its CEO and President both accepted a 100% salary cut through the end of June. These aggressive cost reductions are necessary because UAL is burning $40 million -$45 million of cash daily.
In an effort to save more money, the company has also halted over 200 real estate projects. Finally, United has reduced spending on over 300 technology initiatives. While the latter two actions will save the company $300 million today, they may damage it once demand rebounds. But they are worthwhile because the company needs financial liquidity to survive.
In the first quarter, UAL lost $1.7 billion, its first loss since the first quarter of 2014. It had around $7.2 billion of liquidity at the end of the quarter. At a burn rate of $45 million per day, the company can potentially operate for another 160 days before running out of cash.
The chart below shows that, as UAL stock fell, its moving average convergence divergence signaled a “buy” in March 2020. The indicator now signals selling pressure ahead.
Chart courtesy of Stock Rover
On a positive note, United expects to receive another $2 billion by the end of next month from the government’s payroll support program.
Opportunity with UAL Stock
United should expect a slow increase in passenger loads as the economy continues to open. But the company will need to prioritize its customers’ safety.
For example, it will leave certain seats empty to maximize the distance among passengers, hurting its revenue per fliight. And there probably won’t be strong demand for airplane tickets. Until the novel coronavirus is fully contained everywhere around the world, United should expect weak demand for airplane tickets.
United said that “airlines are, I think, actually the leading industry in the world when it comes to safety…. Airlines will get this part right on safety. And we’re already taking the lead and doing incredible things.”
If the airline can convince its customers that they can fly again without getting infected, then demand may return to normal levels. But the timing of that recovery is uncertain.
How Much Is UAL Stock Worth?
Few analysts have updated their price targets on United recently. In fact, the last few analysts who issued notes on the stock and have “buy” ratings on the name had targets of $51-$54.
But Stock Rover gives United a high value and growth score:
| Value Score | 87 |
| Growth Score | 83 |
| Quality Score | 79 |
The stock’s quality score would improve if the company reduces its debt and increases its gross margins. That will not happen, however, until its business recovers.
But it’s practically impossible to know when demand for flights will rebound. Investors, however, could consider buying the stock at a discount. That would compensate them for taking a risky bet on the airline’s revenue rebounding.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, he did not own any of the aforementioned securities.
