Increased Demand and Substantial Liquidity Makes United Airlines Stock a Winner

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Airline companies continue to add flights despite a steady increase in Covid 19 cases, suggesting a surge in demand. Airline stocks have recovered somewhat from mid-March lows. United Airlines (NASDAQ:UAL) and United Airlines stock are up 28% in the past couple of months in line with other major USA legacy carriers.

ual stock
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Despite a 90% drop in revenues in the second quarter compared to the year-ago period, the sector continues to witness higher traffic numbers. TSA reported a 136% increase in passenger throughput on June 29, compared to the preceding four weeks. United Airlines recently announced that it would be adding 25,000 domestic and international flights in August but estimates that it would only fly 48% of its domestic schedule compared to the same period last year.

I wrote about United Airlines a few weeks back and my thesis was for investors to wait until demand picks up substantially. Though demand is still lagging behind last year’s numbers, I feel it is enough to make United Airlines stock a buy. Let’s look at the company’s situation in more depth.

Ample Liquidity

United Airlines is in a strong position in terms of its financial flexibility. It previously struggled to raise debt but recently it announced that it expects to gain a $5 billion loan by offering its Mileage Plus loyalty program as collateral. Moreover, it has also applied to the second portion of the CARES Act loan which totals $4.5 billion. On top of that, it also has $2 billion in undrawn credit, $2.75 billion in term loans, and $1.1 billion equity. Therefore, its available liquidity is in excess of $20 billion.

United will also look to aggressively pursue its downsizing goals after September 30. It is already time off from work programs and reduced hours for employees. The company’s goal is to reduce cash burn to zero by the end of the year, which should fall below $40 million a day in the third quarter.

Improving Traffic

Airline traffic is steadily growing, which is a positive sign for the travel and hospitality industry. Passenger throughputs are up according to TSA figures but are still significantly lower than 2019 levels. United expects its revenues for June to be down at least 88% year-over-year. However, it also expects revenues for July to be 50% to 100% higher compared to June.

The airline has also reported a sustained increase in load factors to 50% in June and 55% in July. Ticketed passenger revenues are also expected to rise to 15% of 2019 levels in the third quarter. Considering third-quarter revenues for United Airlines in the past year were $11.4 billion, 15% equates to a relatively impressive $1.71 billion.

Perhaps the area which will continue to be problematic for airline companies will be international traffic. Before the pandemic, United was operating the largest international route system in the USA. However, since the lockdown, United and other carriers are forced to predominantly operate cargo-only flights.

Valuation

There are differing views about how airline stocks should be valued at this time. Credit ratings for all airline stocks have been downgraded in the past three months. However, some analysts remain bearish about the long term prospects of the airline sector. The mean price target for United Airlines stock has declined by 27.8% in the past three months. Currently, the mean price target for the stock is $41.20 which is over 15% higher than its current stock price.

However, the difference between high and low estimates for the stock is considerably high which suggests that the market could correct itself. Additionally, it is trading at a 65% discount with respect to the trailing PE ratio for the S&P 500 index. Overall though, it is mostly in line with the valuation metrics in the industry. It’s difficult though to predict how the stock will move in the coming months, considering the massive volatility in the market.

Final Word on United Airlines Stock

I wasn’t too upbeat about the prospects of United Airlines stock in my last article. I felt that demand recovery was still in its early stages, and wanted to play the waiting game for a month or so to see how things changed. United Airlines stock is in a much better position than it was a couple of months ago. With the sustained rise in airline traffic and solid liquidity figures, I feel that United Airlines stock is investable at this point.

As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/increased-demand-and-substantial-liquidity-makes-united-airlines-stock-a-winner/.

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