United Airlines (NASDAQ:UAL) stock has had a difficult year, but it is still very undervalued.
UAL stock is down over 58% year-to-date, but it’s likely to turn around. For example, the stock is already up over 20% from its early July lows around $30.
Keep in mind that this assume that one or several efficacious Covid-19 vaccines becoming widely available before the end of the year. This is what President Donald Trump promised recently.
In addition, the FDA scheduled a meeting on Oct. 22 of its Vaccines Advisory Committee to discuss authorizations of Covid-19 vaccines. The market will be watching this very closely.
The sentiment the results of this meeting and related authorizations will have on the general traveling public could be enormous. And in a certain sense it mostly doesn’t matter since it seems apparent that by early 2021 there will likely be one or several vaccines available.
At that point, I believe there will likely be a large uptick in airline revenues, as people begin to feel safer about traveling.
United Airlines’ Recovery Progress
The airline is slowly recovering and the market is starting to take notice. For example, on Sept. 4, the company said it expects to fly 40% of its full schedule in October.
This is up from 34% in Sept. it also includes flying 46%, or almost half of its full schedule in the U.S. Moreover, United is slowly adding to its international airline schedule.
Previously CEO Scott Kirby told CNBC that United Airlines’ revenue will plateau at 50% of its 2019 schedule until there is a vaccine.
During last quarter, the company burnt $40 million per day. This quarter it expects its daily cash burn to fall to $25 million per day in the third quarter. The company says it had $18 billion in cash by the end of Q3.
Therefore, even if its cash burn does not improve in the fourth quarter, which is unlikely, United Airlines is burning about $2.275 billion per quarter. This also include changes in working capital, but does not include changes in cash from PPP loans, restricted cash and any equity raises.
Nevertheless, the company seems to have plenty of liquidity to continue to finance losses for at least seven to eight quarters. This is not going to happen, short of any major catastrophes.
For example, the company said it was going to eliminate 16,000 jobs starting in October, in order to reduce its expenses. Moreover, the company previously warned 36,000 employees could be furloughed after Oct. 1, when federal aid runs out. In effect, United Airlines is extremely serious about reducing its costs.
What To Do With UAL Stock
Since United is still losing money it’s hard to value UAL stock. According to a Yahoo! Finance‘s poll of 18 analysts, United Airlines is expected on average to still make negative earnings per share next year. They forecast an earnings loss of 23 cents per share.
However, the same poll forecasts average revenue will rise to $27.6 billion in 2021, up from an estimated $16.6 billion in 2020. However, keep in mind its 2021 forecast is still well below 2019 revenue of $43.3 billion.
But this doesn’t mean UAL stock will not recover. For example, before long analysts will likely be predicting profits for 2022. The market focuses on earnings within six to nine months from now.
Here is one way to value UAL stock. Use a percentage of its average earnings, adjust this with a probability estimate and then discount it back to the present.
For example, United made average diluted EPS of $8.2725 in the last four years. Let’s assume in two years, by the end of 2022, it can recover to 75% of that EPS. Plus let’s assume a 75% probability. That means earnings per share of $4.653.
Morningstar says the multiple was 8.18x over five years to 2019. Therefore, the UAL stock target is $38.06. Assuming a 10% discount rate, the present value $31.45 per share.
UAL stock will likely make more than these assumptions. This makes it worth much more.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
