Given that the aviation industry is still coping with the spread of the novel coronavirus, it’s not difficult to build a bear case for United Airlines (NASDAQ:UAL). As a staunch contrarian, however, the widespread pessimism makes me want to argue in favor of holding United Airlines stock.
That being said, I certainly won’t recommend refusing to acknowledge the lasting impact of the coronavirus. As Louis Navellier and the InvestorPlace research staff pointed out, passenger traffic is still down by more than half compared to a year ago.
On top of that, United Airlines burned through an estimated $25 million per day during the third quarter. Therefore, I’m not predicting a complete turnaround in United’s fortunes tomorrow or next week.
Rather, I’m preparing for a slow, rocky recovery in United Airlines stock. There will be no shortage of speed bumps along the way. Perhaps, then, the best strategy is to close your eyes, hold your nose and don’t look at your shares for at least a year. Fair enough?
A Closer Look at United Airlines Stock
From a technical standpoint, it’s impossible to ignore the damage done to United Airlines stock by the onset of the coronavirus. Last year, the conversation was about whether the stock price would finally make a decisive break above $90.
The tone of the conversation is quite different today, of course. No one except the most optimistic shareholders are talking about $90 anymore. The bulls first need to see a breakout above $40, which has provided a frustrating resistance level for several months.
That having been said, it’s encouraging to observe that United Airlines stock at least appears to have firm support at $30. Still, this doesn’t provide any guarantee that the share price won’t fall below that level.
Since there are no dividends to collect at the moment, United Airlines stock are counting on share price appreciation. Whether their profit plans pan out depends on the progress of the company, and of the aviation industry as a whole.
A Voice of Long-Term Optimism
In a move that goes against the grain, Berenberg analyst Adrian Yanoshik reaffirmed his rating of “hold” on United Airlines stock. At the same time, Yanoshik Yanoshik reduced his estimate for the airline industry’s revenues by 20% for the second half of 2020. Moreover, he slashed his estimate for 2021 by 15%.
So, how is it possible for Yanoshik to maintain his “hold” rating on UAL? On the face of it, there seems to be a contradiction here.
To reconcile the analysts’ predictions, it’s important to keep in mind that Yanoshik appears to be thinking long-term. Specifically, he projects that the airline industry will manage to reclaim 60% of 2019’s traffic levels by the end of 2021.
That’s not a complete recovery, but we have to be realistic in our expectations. After all, the pandemic crisis won’t be resolved this year.
Doing What’s Needed
And so, being 60% of the way back to pre-crisis airline traffic levels is pretty darned good. It’s possible to see the glass as half full if you’re not obsessing over today’s problems.
I have to give the analyst community credit for being able to see a brighter future ahead of us. As evidence of this, note that among the pool of Wall Street analysts, United Airlines stock has five “buy” ratings, 8 “hold” ratings and no “sell” ratings.
And it’s not as if United Airlines is just sitting idly. For one thing, the company announced its plan to to furlough more than 16,000 jobs in October. That’s an unfortunate thing to have to do. Yet, it’s probably a necessary part of the streamlining and cost-cutting process.
Furthermore, for travel within the United States, United Airlines permanently canceled its $200 flight ticket change fees. I’d say that’s a smart move as the company must do whatever it takes to encourage people to book flights.
The Bottom Line
Flight market conditions aren’t great right now. Yet, it’s conceivable that they’ll improve in time.
That, along with some proactive steps that the company’s taking, should provide some long-term relief for United Airlines stock holders.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
