Investing doesn’t have to be as complicated. That’s the case with United Airlines (NASDAQ:UAL) and the F-rated UAL stock, which investors should simply avoid here.
The novel coronavirus is a tragic development for global health, and its negative repercussions on a number of different sectors and individual businesses have been well-covered. The airline industry is one of the hardest-hit parts of the economy. And UAL stock is one of the clear losers.
Numbers may not be entirely necessary to back this up, but they help paint the picture. In the first quarter, global commerce and travel rapidly deteriorated. United’s operating revenue fell nearly 17%. Total operating expenses, however, only fell 1.6%, and the company reported a net loss of $1.7 billion.
Warren Buffett Bailed on UAL Stock
The qualitative measures for the airlines don’t look too hot, either. Warren Buffett took to the hills and sold off 100% of Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) airline holdings, UAL stock included. That certainly doesn’t help anything.
Buffett knows how to pick the winners, but he also knows when to cut his losses. United Airlines specifically told investors it expects to burn between $40 million and $45 million a day in the second quarter.
The U.S. government has already agreed to provide $5 billion in liquidity to United Airlines. The company has a debt-equity ratio around 1.9 — one of the worst of the major airlines.
It’s not just Buffett that’s sour on airlines. Even industry heavyweights are having their doubts. Boeing (NYSE:BA) CEO Dave Calhoun isn’t sanguine on the future of the industry himself.
When asked in a recent interview whether one of the major U.S. carriers would be forced to go out of business, Calhoun said “Yes, most likely.”
Analysts expect revenue to plunge 44% year-over-year in 2020. They also are calling for UAL stock — which has a 52-week low around $18 — to lose $21.50 per share on the year.
Clearly, UAL was forced to suspend share buybacks, which should be considered a thing of the past for the time being. When you’re selling billions of dollars in warrants to the U.S. government, it usually spells trouble.
The Bottom Line on United Airlines
It’s the combination of qualitative and quantitative factors that make UAL stock simply not worth it for investors right now.
Buffett isn’t afraid of troubled industries. He famously took to the financial sector in the midst of the Great Recession, scoring sweetheart deal after sweetheart deal to prop up the industry in a role that’s been taken up in 2020 by the federal government.
Even with the global and domestic economy reopening, changes in consumer behavior are likely to linger. Reduced leisure travel and business teleconferencing are sure to hit demand for several years.
There needs to be more visibility for stocks like UAL before shares can be seriously considered as an investment option. In the meantime, a wildly unprofitable company in an industry the U.S. government is propping up isn’t the best place to put your money.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
