United Airlines (NASDAQ:UAL) announced Q1 earnings on Apr. 30 after market close. Management also discussed them with investors the next morning. The COVID-19 pandemic has meant a scary fallout for travel and airline stocks. Year-to-date, UAL stock is down about 66%.
Yet that price decline shows only half the story. In recent weeks, markets have been rising on days we get optimistic headlines regarding the potential end of the lockdown. UAL shares have also gone up. On March 18, they hit a multi-year low of $17.80. Now they are hovering around $29. That is an increase of over 60%.
So should you commit new capital to the airline? I believe any potential short-term recovery has already been priced into UAL stock. Therefore if you are not yet a shareholder, you may want to wait for a pullback in the shares. Here’s why.
What Q1 Results Show
The past several weeks must have been among the most challenging in United’s recent history. On Apr. 15, Oscar Munoz, Chief Executive Officer, and J. Scott Kirby, President, issued a joint statement saying “The challenge that lies ahead for United is bigger than any we have faced in our proud 94-year history. We are committed to being as direct and as transparent as possible with you.”
The Chicago-based carrier has just released its first-quarter results with a net loss of $1.7 billion, diluted loss per share of $6.86, and pre-tax loss of $2.1 billion.
Mr. Munoz’s solemn words in the earnings statement possibly sum up the mood for the industry in general: “While we are still in the midst of this crisis, we will not hesitate to make difficult decisions we believe will ensure the long term success of our company.”
By comparison, in late January, when the airline released Q4 results, its earnings of $2.67 per share had beaten estimates. United’s profits had surged close to 40% on cheaper fuel and strong demand.
The group also announced net income of $614 million in the fourth-quarter, up 39% from the year-earlier period on revenues of $10.89 billion. The revenue had also been about 4% higher than a year earlier.
Put another way, it is easy to see the adverse effect of the coronavirus-induced uncertainty on UAL earnings. My main takeaway from United’s quarterly results and the conference call is that life will not be the same for at least some more time to come. Could airlines’ losses be even worse when the next quarterly numbers come out later in mid-summer?
Can UAL Stock Price Reach Pre-Coronavirus Highs Soon?
As the conversation shifts to the next few months, I don’t expect UAL stock to go back to its January 2020 levels anytime soon. So far in 2020, the shares have seen a high of around $90.
All major air carriers have recently agreed to receive grants, payroll support from the U.S. Treasury, as well as low-cost loans. In total, United now has access to around $9.5 billion in funding from the federal government.
Yet the stimulus package comes with several strings attached. It would “prohibit stock buybacks and share dividends for at least a year after the loans have been repaid. It also restricts executive compensation.”
United Airlines has already suspended share buybacks and dividends. Now that airlines will not be able to buy back their shares or offer dividends, it is quite difficult to make a long-term bullish case for most airline stocks, including UAL.
In fact, in late April, it sold $1 billion of stock. It was the first major airline to sell equity, aiming to stay afloat amid the daily cash burn. As per the Q1 statement “the company currently expects daily cash burn to average between $40 million and $45 million during the second quarter of 2020.”
Yet this equity offering was rather unexpected. Why did management decide to dilute equity when it had obtained aid from the Treasury?
At this point, United looks capitalized enough to go through the rest of the year. However, if airlines cannot start flying again soon, the Street may well become concerned about potential longer-term funding risks.
The Bottom Line on UAL Stock
On Apr. 30, United released Q1 results which to me showed how unsurprisingly difficult the rest of the year may prove for the airline and its peers. On paper, all airline stocks, including UAL, look cheap. But that may be so for a good reason.
At this point I’d avoid UAL stock. We simply don’t know when there will be an eventual rebound in air passenger traffic numbers.
One final point to remember about United Airlines is that it has high international exposure. And international flying may be one of the last areas where countries will lift restrictions and open their borders to flights fully again.
Instead I’d invest in other firms with solid earnings that can be relied upon through an economic recession. Overall, our economy is resilient enough to come out of the COVID-19 crisis in future months. Therefore, with some research and due diligence, you would likely find many robust companies that could belong in a long-term portfolio. My InvestorPlace colleagues also regularly cover equities that may do well in future months.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
