There is a case for airline stocks at the moment. But choosing United Airlines (NASDAQ:UAL) in that group seems potentially foolish. There’s just not a strong enough argument for United Airlines stock even for investors bullish on the sector.
With United set to report second quarter earnings on Wednesday morning, some investors might hope that UAL stock is nearing another bottom. Indeed, airline stocks have caught a bounce in recent sessions, after fading from early June highs.
From a short-term perspective, the rally may continue. Investors are getting earnings next week not just from United, but from Southwest Airlines (NYSE:LUV), American Airlines (NASDAQ:AAL), and Alaska Air (NYSE:ALK) on Thursday morning. The numbers are going to be ugly, as a report this week showed, but at this point any news might be considered good news.
Taking the broader view, however, an investor choosing United Airlines stock now needs to believe the name will outperform. For several reasons, that seems doubtful. There are key concerns here, concerns that aren’t going to be fixed by earnings next week — or any time soon.
The Delta Problem
We know United earnings are going to be historically awful. Obviously, the performance will have little, if anything, to do with United’s execution. With airports shut down and flights canceled worldwide, there simply was nothing United or its peers could do.
Delta stock declined after the report, though it’s likely a headline earnings miss wasn’t the culprit. Rather, as I wrote before that release, Delta management needed to tell a story that could inspire confidence. Unsurprisingly, it wasn’t able to do so.
It’s difficult to see how United can do any better. Its management credibility is far lower. Despite one of the industry’s highest debt loads, United made little effort to fix its balance sheet before the pandemic hit, despite an economic recovery that was the longest on record. In fact, its debt rose in recent years.
Meanwhile, Delta already tamped down expectations. Its chief executive officer warned investors that it would be “more than two years” before the industry recovered. If United executives are more optimistic, I’m skeptical investors will listen. And that in turn suggests that United Airlines stock is going to have a hard time rallying. If anything, it may decline, as DAL stock did.
This short-term issue facing UAL after earnings also speaks to a broader problem: why should investors choose United over other names in the sector?
In fact, I’d look to Southwest in particular. Unlike its peers, Southwest has never gone bankrupt. Its balance sheet is in much better shape. Its management is far better-regarded.
And at least relative to current 2021 analyst expectations for the sector, LUV stock is cheaper than UAL on an earnings basis.
To be fair, United Airlines stock probably has more upside than Southwest. Higher debt and thinner margins both suggest more room for improvement. But that still leaves UAL stock as a pick for a so-called ‘V-shaped recovery’. Delta management made clear this week that such a recovery isn’t on the way. It seems unlikely that rivals will have a different outlook next week.
The Recent Rally in United Airlines Stock
Of course, there’s one retort to all of this pessimism: UAL stock actually gained in recent sessions.
But it’s worth noting what drove the rally. It wasn’t Delta earnings. Rather, as the always-excellent Matt Levine noted at Bloomberg, it was good news from biotech Moderna (NASDAQ:MRNA). Moderna’s progress toward a vaccine for COVID-19 sent a number of travel-related stocks soaring, including airlines.
Even those gains, however, color the case for United Airlines stock. If UAL is only going to rise based on broader optimism, then there’s an even broader group of stocks to choose from. Moderna’s news didn’t just help airlines, but cruise operators and restaurants as well.
Essentially, UAL needs outside help to rally. It needs progress toward normalcy, whether via a vaccine, treatment, or lowering case numbers. And if that progress arrives, it should help other, higher-quality names in and out of the airline sector. As a result, investors should be looking to those names — both before and after next week’s earnings.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.