You’re invited to a bonfire. It will cost you $48/share to join.
That’s the price of United Airlines (NYSE:UAL) stock entering trade Dec. 10, a market cap of $14 billion. The company celebrated a cash burn rate of $25 million per day in its third quarter “earnings” report. The next day it announced the rate had fallen to $21 million. (We’re winning!?)
To “achieve” this, the airline cut operating expenses 58%, from almost $10 billion to just over $4 billion. When United reports on Jan. 13, analysts are expecting another $1 billion loss, or $3.65 a share, on revenue of $3.65 billion.
They may be disappointed.
Desperate Holiday Times
The disappointment is because the latest spike in COVID-19 infection is cutting air travel, again. Bookings are dropping, cancellations are rising. The airline may have to cut its schedule, already half of what it was, yet again.
At the end of September, United was carrying almost $14 billion in cash, funded by more than $28 billion in debt, to keep the cash burning. The hope is that the loans will get it to the other side of the pandemic, when ample vaccines mean people can sit in a plane for hours without fear of infection.
Meanwhile, the airline is using software to find money under every seat cushion. It pledged its new 777s to increase government loans, to $7.5 billion. It will clear the pandemic trees, but barely. It’s cutting customer service costs with virtual agents in hub airports.
Better Off Dead?
United has racked up $8.2 billion in losses during 2020, not counting the current quarter. If an activist bought just 5% of the common, these losses — which could offset future United profits — would be at risk. United is rushing through a “poison pill” plan to prevent this at its next annual meeting in May.
Adopting the provision would make a takeover to take the losses away unlikely. Hedge funds couldn’t buy the airline cheap, close it, then use the losses to offset profits elsewhere. It also means hedge funds won’t be interested in buying the stock.
The losses are especially valuable because the Biden administration hopes to raise corporate tax rates, to 28% from 21%. At the higher rate, United would use 2020 losses to offset $2.3 billion in profits each year, until the losses are exhausted.
United is making promises wherever it can. Like other airlines, it’s ditching change fees on international flights (for now). It’s taking eight new 747-MAX jets this month to build goodwill for Boeing (NYSE:BA), which may accrue to it down the road.
All this makes United an interesting speculation. Buy it now and you’ll see big tax-free profits once all this is over. Some of those profits will come from distributing the vaccine itself. This has sent the stock up 16% just in the last month, although for all of 2020 it’s still down about 45%.
The Bottom Line on United Airlines Stock
In the four years before the pandemic, United Airlines stock gave shareholders capital gains of roughly 15% per year. It was a steady investment for conservative investors.
Since the pandemic began, all that has changed. UAL has become a trader’s stock, incredibly volatile but also highly profitable for those who guess right. The share price doubled between mid-May and early June. Since Halloween it’s up almost 50% again.
What it means for investors is that, if you’re in this stock, your fellow passengers are very nervous. They’re looking for quick profits or (perhaps) quick losses they can short.
Analysts are narrowly divided. You might make big money. But fasten your seat belts because it’s guaranteed to be a bumpy ride.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.