United Airlines Holdings (NASDAQ:UAL) believes it will be the first airline to turn cash-flow positive. That will be quite an accomplishment that will boost United Airlines stock when it happens.
That is what management said in its commentary during its Q3 conference call on Oct. 14.
Of course, talk is cheap. United Airlines’ management did not say when this would happen.
In fact, during the conference call, they projected that cash burn during Q4 would stay negative.
Cash Burn and Liquidity Issues
Here is exactly what they said about its present and ongoing cash burn and liquidity. During Q3 the company had an average daily cash burn of $25 million, which included $4 million of average debt principal payments.
The company said that was its target for the quarter. Moreover, this was significantly better than the $40 million average daily cash burn in Q2. That included $3 million of average daily principal debt repayments.
However, the company’s outlook for Q4 is level to slightly higher. It will burn between $15 to $20 million, and $10 million of severance and debt principal payments.
In other words, cash burn will increase either stay at $25 million or rise to $30 million, all in.
Moreover, the company said it had $19.4 billion in liquidity at the end of Q3. The last time it reported on liquidity on July 21, it said liquidity was $15.2 billion. Therefore, its liquidity actually improved, despite the quarterly cash burn.
For example, the actual cash burn during Q3 was $2.254 billion, or $25 million per day for 92 days. Q4 will also have 92 days, so the daily average could result in a loss of another $2.254 billion.
In addition, United’s liquidity did not fall during Q3 since it was able to borrow $6.8 billion against its Mileage Plus program.
The company said on the conference call its Q4 liquidity would fall to $16 billion unless it borrows $2.3 billion. This will be available to United under the CARES Act loan program.
In other words, the company will have enough to get through Q4. Moreover, its statement that it will be the first to be cash positive is likely based on its own internal projections for either Q1 or Q2 of 2021.
What Analysts Are Now Saying
Barron’s reported on Oct. 16 that JPMorgan analyst Jamie Baker’s recent research report on United Airlines stock was quite positive. He wrote that United and Delta Air Lines (NYSE:DAL) could turn profitable earlier than other major airlines.
The major reason is that they only require an increase in traffic to between 45% and 50% of 2019 levels. They have kept their costs and schedules in check better than the other airlines.
Moreover, any increase in international fares would accrue straight to the bottom line.
For example, United recently said that it had added 9 new international routes and resumed or added 78 routes in 33 countries during Q3.
The revenue starting point was close to zero in these routes according to Baker. Therefore their growth would accrue straight to cash flow.
TipRanks.com reports that 12 analysts who have covered United Airlines stock in the past 3 months have an average target of $42.71. That represents a 26.14% increase over the price at the end of Oct. of $33.86.
Yahoo! Finance says that 17 analysts have a target of $42.18, which is close to the TipRanks survey.
Similarly, Marketbeat.com reports that 18 analysts have a consensus target of $55.71. This represents a potential gain of over 55% on the present price.
What to Do With United Airlines Stock
That could take some time to make this 55% return. Let’s say it takes to the end of 2022, or 26 months from now.
Nevertheless, that would still represent a compound average annual return of 22.4%. This is still a decent ROI for most investors over that period.
I believe that return could accelerate if United Airlines achieves cash flow profitability before other airlines in early 2021. Therefore, United Airlines stock looks like a reasonably good investment at this point.
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.