United Airlines Stock Could Go to $30 Before $40

As the airline gets ready to report Q2 earnings, UAL stock may be volatile with a downward bias

As the new earnings season gets under way, investors in United Airlines (NASDAQ:UAL) stock are wondering whether the stock will continue to recover some of its 2020 losses. So far in the year, UAL stock is down over 63%, currently hovering at $34.

united airlines plane
Source: travelview / Shutterstock.com

If you are not yet a shareholder, you might want to first analyze the group’s Q2 results that are due in a few weeks. Although the company has not yet announced the date, the results are expected on July 21.

UAL stock is likely to be volatile at the time, possibly with a downward bias. I expect the shares to move toward $30. Therefore if you are not yet a shareholder, you may want to wait for a pullback to commit new capital to the stock.

What to Expect from Q2 Results

The past several months must have been among the most challenging in most airlines’ recent history, as the COVID-19 pandemic has meant a scary fallout for travel stocks. United Airlines announced Q1 earnings on April 30. The Chicago-based carrier reported net loss of $1.7 billion, diluted loss per share of $6.86, and pre-tax loss of $2.1 billion.

Management also announced that the daily cash burn would be between $40 million and $45 million during the second quarter of 2020. Airlines are highly capital-intensive businesses and it costs dearly to maintain planes and pay for other fixed assets.

Since late April, our economy has started opening up. Yet air travel has not yet increased much. Transportation Security Administration (TSA) releases regular updates on TSA checkpoint travel numbers. According to the most recent data, on Wednesday, July 1, total traveler throughput was 626,516. Last year, on the same weekday, it was 2,547,889. That is a decline of over 75%.

However, the current numbers are an improvement from where the level was earlier in the year. For example, the numbers were: 

  • June 1: 353,261
  • May 1: 171,563
  • April 1: 136,023
  • March 1: 2,280,522

Put another way, airlines are seeing improved passenger numbers at this point. However, as you would have noticed, the metrics for Q2, i.e., the months of April, May, and June, were rather dismal. It would not be wrong to say that they would have represented new record lows for traffic in over a decade. It is highly likely that losses for most airlines including United will be quite high when the next quarterly numbers come out.

And if a second wave of the pandemic takes over our daily lives again, demand for air travel may not be able to increase at a rate that airlines would hope to see.

Can United Airlines Stock Reach New Highs Soon?

As the conversation shifts to the second half of the year, I don’t yet expect UAL stock to go back to its January 2020 levels when it saw a high of around $90. Its 52-week high was $96.02, hit on July 19, 2019. It had seen that level soon after the release of its Q2 results on July 16 of that year.

Are you wondering whether the shares are a value pick, especially on the basis that United Airlines stock now trades about 65% below its 52-week high?

I do not expect the shares to go back to the $90s-level any time soon. In fact, UAL stock may not likely reach $40 in July, either. After all, the main cause of the price decline, the pandemic, is unfortunately still with us. Although aviation demand possibly bottomed out in April, we’re nowhere close to pre-COVID-19 air passenger traffic levels. It may be a few years before demand stabilizes and goes back to early 2020 levels.

Earlier in April, all major air carriers agreed to receive grants, payroll support from the U.S. Treasury, as well as low-cost loans. Furthermore, as part of the stimulus package, United Airlines has had to suspend share buybacks and dividends. Now that these airlines will not buy back their shares or offer dividends, it is quite difficult to make a long-term bullish case for their stocks unless travel demand improves significantly.

One final point to remember about United Airlines is that it has high international exposure. And international flying is still limited. In fact, the European Union (EU) has declined to open its borders to travelers from the U.S. The U.K. has decided to keep quarantine in place for those coming from the U.S. Therefore, non-essential travel over the Atlantic, at least this summer, does not seem possible.

The Bottom Line on UAL Stock

On paper, all airline shares, including United Airlines stock, look cheap. But that may be so for a good reason. A potential surge in coronavirus cases will hinder the airline industry further in the second half of the year.

The world is ready to hear good news on vaccine development as we hear of progress being made. But even if there is a vaccine by the end of the year, it probably is not going to help the UAL stock any time soon.

Since the lows seen in mid-March, United Airlines stock is up about 90%. Therefore some short-term profit-taking is likely to be around the corner, especially prior to the Q2 earnings release. If you are a short-term investor, you may want to consider de-risking at this point.

Alternatively, you may also consider hedging your position with covered calls. For example, Aug. 21 expiry ATM calls would decrease portfolio volatility and offer investors some downside protection. It’d also enable investors to participate in a potential up move following the earnings release.

If you are planning of investing in airline stocks, a pull back toward $30 or even below could be a better entry point into UAL stock.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, 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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/united-airlines-stock-could-go-to-30-before-40/.

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