United Airlines (NASDAQ:UAL) reported its earnings Jan. 20 and said it hopes to recover in 2022 while it is rebuilding in 2021. As a result, UAL stock is in trouble, ending the month down 8.6% in the past month, although it is still up 18% in the past three months.
The problem is cash burn. It is still very high. It burnt through an average of $33 million a day in the fourth quarter, including severance payments and debt principal payments. That was worse than the daily $25 million cash burn during the third quarter on the same basis.
United pointed out that its core cash burn was only $19 million versus $24 million in Q4. But that is if you take out severance payments, principal payments, and capital expenditure spending.
This is a completely useless measure. The company has to make these payments. They are not discretionary. Therefore, the overall cash burn was higher and the company is in more trouble this quarter than last quarter in terms of burning through its cash.
You know things are bad when management calls the current a year of “transition year that’s focused on preparing for a recovery.” But last year the airlines portrayed 2021 as the recovery year.
What Analysts Think About UAL
United posted a loss of $7 per share, well below analysts’ estimates of a loss of just $6.60 per share, according to Reuters using IBES data from Refinitiv.
However, one good point is its liquidity. It had $19.7 billion of liquidity as of Dec. 31 and should have a similar level by the end of Q3. That is despite its cash burn, implying that the company expects to raise debt or equity or sell assets during the quarter.
In addition, it expects to see cash burn lower through at least $2 billion in cost reductions during “going forward.” This is after it identified $1.4 billion in core cost savings over the past year. Interestingly the press release did not discuss any estimate of cash burn for the first quarter.
In the past, it had provided forecasts. For example, last quarter it told analysts that its internal projections for the first half of 2021 were that the company would become cash-flow positive.
Contrast this silence on its cash burn projections with Delta Air Lines (NYSE:DAL) whose management told investors they expect to see a “cash burn positive spring.”
One analyst at Seeking Alpha astutely points out that United Airlines is having issues with regaining business travelers and its hub-spoke system. Apparently, it has fewer passengers flying into its hubs than other airlines – a situation it needs to correct to regain profitability.
Moreover, it has higher international exposure than other airlines and international travel has been particularly hard hit. The Biden administration put a new quarantine on all international travelers.
What To Do With UAL Stock
Scott Kirby told CNBC’s transportation analyst Phil LeBeau that he expects “flatlined” demand in the first quarter like it was in the fourth quarter. He also said that although there was pent-up demand for air travel, it will continue to be a “tough environment” for the aviation industry. Those are not the words of a CEO who sees things turning around this quarter.
As the Financial Times pointed out, quoting a Cowen analyst, there is a limit to cost controls. The industry needs a recovery. Demand needs to pick up, especially business and international demand.
That is not going to happen during the first quarter. If you are already invested in UAL stock, then look for opportunities to average cost down into your holding during this quarter. You almost certainly will have a chance to do so.
One way that I like to do this is to sell weekly out-of-the-money puts well below the present price of a stock.
Selling Out-of-the-Money Put Options on UAL
For example, you could sell puts at an exercise price of $36 per share, or 10% below the Feb. 1 price of $39.94 for a price 8 and 12 cents for the expiration period that ends Feb. 5. That works out to about a 1% monthly rate of return (i.e., 27 basis points weekly from receiving 10 cents divided by $37).
If the UAL stock drops 10% to $37 you have to buy it, but that is OK. You got paid to wait to buy it and it’s lower than if you bought it at $39.94.
Over time this is a way to average cost into your holding. In addition, if you haven’t yet bought UAL stock it allows you to buy in at a lower price. Keep in mind that the only way your option would be triggered, forcing you to buy at $37 per share, is if the stock is below $37. That’s OK as well, since you received 10 cents ahead of time, lowering your overall cost.
Investors might want to use this method to poke their toe in UAL stock without having to commit to a market price.
On the date of publication, Mark R. Hake did not hold a long or short position (either directly or indirectly) in any of the stocks in this article.