United Airlines (NASDAQ:UAL) is struggling to survive. Investors should wait to invest in UAL stock. It is likely that the stock will crater at least one more time.
The losses will mount for the company over the next several quarters. CEO Oscar Munoz said in the Q1 earnings release on April 30 that United Airlines expects to burn between $40 and $45 million per day on average during Q2. The burn is defined as cash flow from operations less financing and investing activities before any loans or grants.
As a result, expect United Airlines to post pre-funding cash flow losses of at least $3.87 billion in second quarter and possibly slightly less during Q3. It all depends on how quickly travelers are willing to fly again, especially business travelers. Total losses could reach over $7 billion.
How United Airlines Is Funding Its Losses
United Airlines has raised significant amounts of debt and equity to handle this. According to the Wall Street Journal, the company has $7.2 billion in cash at the beginning of May. This includes $2.5 billion already received as part of a $5 billion loan and grant program for the U.S. government.
So, at least on paper, the company has sufficient liquidity to handle two full quarters of significantly reduced consumer travel. That is because expected losses of $7 billion over two quarters are covered by the $7.2 billion from debt and equity raised at the corporate level.
In addition, the company applied for $4.5 billion in loans under the CARES Act. It has until Sept. 30 to decide whether it will take the funds.
Dilution to Shareholders of UAL Stock
This new debt and equity come at a significant cost to shareholders. For example, United Airlines’ recent equity raise diluted existing shareholders by 15.5%. This is because there were 253 million shares outstanding before the sale at $26.50 per share for 39.25 million shares.
In addition, according to an author in Seeking Alpha, United Airlines had to issue 4.6 million warrants (long-term options) to the U.S. government. These allow the U.S. Treasury Department to buy shares at $31.50 per share.
If United Airlines decides to take the CARES loan, it will have to issue another 14.2 million warrants. In other words, 18.8 million shares are potentially issuable to the U.S. Treasury.
This represents another 7.4% dilution to existing UAL shareholders. All told, the total dilution for UAL stock is as much as 22.9% (15.5% plus 7.4%).
UAL Is in Better Shape Than American
I just wrote an article that details how American Airlines (NASDAQ:AAL) is in trouble. For example, American Airlines expects to burn $70 million per day during Q2. This is significantly higher than the burn rate at United of just $40 to $45 million per day.
American Airlines will likely burn through $6.37 billion in the second quarter alone. Compare that to United Airlines’ expected losses of just $3.87 billion.
Moreover, I pointed out that American Airlines now has negative equity of $2.63 billion. By the end of the quarter book value will fall to negative $13.6 billion or higher.
By contrast, United still has positive shareholders’ equity of $9.4 billion as of the end of Q1. This likely includes the $1.2 billion in new equity raised before fees. Even after expected losses of $7 billion over the next two quarters, book value will still be positive at $2.4 billion.
Wait to Buy UAL Stock Below Book Value
Just like I pointed out in my recent article on Delta Air Lines (NYSE:DAL), investors should wait to buy UAL stock below its book value per share. This is because by doing so you will get a sufficient margin of safety with your purchase.
This is also why Warren Buffett recently sold his stakes in all three stocks (UAL, AAL and DAL) I mentioned here.
So, let’s calculate UAL stock’s book value per share. First, we know there are 290.4 million shares outstanding as of April 30 from United Airlines’ 10-Q SEC filing on May 4.
Second, as of March 31, book value was $9.42 billion. The book value per share is now $32.42 per share ($9.42 million divided by 290.4 million shares).
Third, the company’s goodwill of $4.52 billion and $2.94 billion in intangible assets are deducted from total book value. This leaves just $1.95 billion in tangible book value. That equates to just $6.71 per share in tangible book value per share.
Even if we leave in the intangible book value, since things like landing slots have actual value for collateral purposes, United Airlines has just $4.9 billion in adjusted book value, or $16.87 per share. That means that UAL stock is worth $8.35 per share less than today’s price.
The bottom line: wait for UAL stock to fall another 33% before you consider investing in the stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.
