United Airlines (NASDAQ:UAL) stock benefits from its latest debt round. The company just raised $6.8 billion at a much lower interest rate using its Mileage Plus program assets as collateral. United Airlines declared its coupon rate for a portion of these senior secured notes at 6.5%.
By having this higher-quality liquidity collateral, its Mileage Plus program, the company was able to significantly lower its interest rate from prior borrowings.
The program produced over $1.8 billion in EBITDA last year, independent of the United Airlines operations, according to CNBC.
Liquidity Will Benefit From the Loans
Moreover, the company says it will have about $17 billion in liquidity by the end of the third quarter with these loans. This was based on a press release from the company on June 15. It includes a loan of $4.5 billion from the U.S. Treasury which has not yet closed. These loans are backed by its slots, gates and routes, at a higher interest rate.
But the June 15 press release stated that the mileage program loans would be for $5 billion. On June 25 the company raised the senior secured debt offering by $1.8 to $6.8 billion. Therefore, now United Airlines will have more than $17 billion in liquidity at its disposal.
For example, there will be offering expenses taken out. In addition, the mileage program holding company will keep a reserve before lending it to the airline. So I estimate that about 10% will be kept in reserve and 2% offering expenses.
As a result, United Airlines stock is much more secure, in terms of the company surviving the Covid-19 related travel downturn.
With Lower Cash Burn, Liquidity Means Survival
Therefore 88% of the proceeds, or $6 billion, will be available to United Airlines. That is still $1 billion more than the $5 billion previously estimated by the company. In effect, the company will have $18 billion available by the end of Q3.
CNBC reports that the company says its daily cash burn will fall to about $30 million per day in the third quarter. That puts the potential cash burn during Q3 at $2.73 billion. So the $18 billion in liquidity will be more than enough, it appears, to help the company survive until travel operations pick up.
For example, if the $18 billion has an average $2 billion in burn rate each quarter, the company could last up to nine more quarters. In effect, that is two years of cash burn.
What Analysts Are Saying About United Airlines Stock
Seeking Alpha‘s poll of 18 analysts expect the company to lose $20.92 per share in 2020. But, more importantly, 19 analysts are estimating, on average, positive earnings per share of 66 cents in 2021.
This is similar to the Yahoo! Finance poll of 12 analysts for 2020 earnings. They expect a loss of $21.01 per share in 2020. But 16 analysts expect EPS of $1.60 in 2021, on average, according to the site. This is higher than Seeking Alpha’s estimate.
If we take the average of both polls, the 2021 estimate works out to $1.13 per share. Therefore, at today’s price of $35.27, United Airlines stock trades for around 31 times 2021 earnings.
That is still pretty high. In fact, according to Value Line Research, the stock’s average annual price-to-earnings ratio has been 8.1 times.
So, in effect, analysts must expect that earnings will really normalize by 2022, or else the stock is seriously overpriced.
What to Do With UAL Stock
UAL does not pay a dividend. There is no income to the investor in the stock. The company’s operations are highly dependent now on the emergence of a Covid-19 vaccine. This is probably the single most important event that will induce trust on the part of travelers. Once that emerges, United Airlines sales will recover, especially business travel.
So, until then, the stock market seems to be pricing in a recovery by the end of 2022, based on its existing forward price-to-earnings ratio.
Therefore, with the latest additional borrowings, the company will now have the liquidity to survive over 24 months. That is why the latest debt offering is very beneficial for the value of United Airlines 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.
