United Airlines (NASDAQ:UAL) seems poised to move significantly higher. That is the view of at least one analyst on Wall Street from Raymond James. He came out with a report indicating that United Airlines stock is worth at least $60 per share. That represents a potential gain of over 21% from today’s price of $49.24, as of Dec. 4.
The analyst, Savanthi Syth, believes the industry will obtain a “tailwind” in early 2021 with stimulus programs and vaccine relief from Covid-19. In addition, pent-up demand will likely kick in by the summer travel season in 2021.
But his sole recommendation to buy United Airlines stock was due to its recent agreement with its pilots’ union. That deal put the airline in a better position than its peers.
Moreover, the analyst said that United was not permanently reducing its airplane fleet like other airlines. That will give it a tactical advantage as others will need more time to wind up their schedules and capacity again.
Valuation Estimates For the Airline
But don’t just take this one analyst’s word for it. For example, according to Seeking Alpha, Wall Street believes the airline will finally become profitable again in 2022. For example, the average estimate is for $4.83 per share for the that year.
Therefore, United Airlines stock is now trading for just 10.2x forward earnings estimates. In other words, the market is looking forward to at least two full years to price the stock.
This is a very healthy valuation and indicated that the stock is still very cheap on a long-term basis. For example, the estimates for 2022 for American Airlines (NASDAQ:AAL) are only 13 cents per share. That puts AAL stock at $16.4o on Dec. 4, at 126x 2022 earnings. American Airlines will likely not get back to normal profits for at least three years instead of two like United Airlines.
In other words, United Airlines is clearly the airline stock with a higher quality of earnings than its peers. In fact, that is what it told analysts last quarter. Management told investors they believed their airline would turn cash-flow positive before other airlines.
However, don’t expect a much higher multiple for United Airlines stock. For example, over the last five years, its average price-earnings ratio has been right around 9. That is according to data put out by Morningstar in its analysis section on United Airlines stock.
Therefore, the next move up in the stock will likely be due to higher growth forecasts in underlying earnings power. Even if the earnings multiple rises above 9x , it will likely not stay there too long.
What’s Next With United Airlines Stock
As I wrote last month, United Airlines believes it will have enough liquidity 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 the first half of 2021.
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.
I suspect that once it becomes apparent that the worst is over for the Covid-19 pandemic, more analyst recommendations will come out that are positive. But don’t wait for those reports to propel the stock higher. Investors will catch on much quicker than Wall Street.
Here is one way to simply judge the potential earnings power at United Airlines. At its peak, the company made over $7.6 billion in one year (2015), or $11.39 per share. Let’s s it takes between three and four years for the company to get to 80% of that or $9.11 per share.
Discounting that to the present over three years at 10% per annum leads to a 75.1% discount factor. In other words, in present value terms, EPS is worth $6.84 per share. At 9x earnings United Airlines stock is worth $61.56 per share. That is close to the Raymond James estimate of $60.
Expect the stock to move up to 25% higher over the next year or so.
On the date of publication, Mark R. Hake holds a long position in American Airlines stock (AAL).
Mark Hake runs the Total Yield Value Guide which you can review here.
