Investors Remain Overconfident in a United Airlines Stock Comeback

Is now the time to bet on a recovery for United Airlines (NASDAQ:UAL) stock? In the past year, we’ve seen many false starts for an airline stock recovery following the Covid-19 outbreak. Remember back in June, when airline stocks spiked on recovery hopes, even as the outbreak was still playing out?

UAL stock
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Sure, this time the situation’s a lot different. With the vaccine rollout well underway and evidence of pent-up travel demand coming out, all signs point to an airline industry recovery in a matter of months, not years. In anticipation of a big comeback, investors have bid up this stock in the past few weeks. After trading for $40 per share on Feb. 1, UAL currently trades for around $60 per share.

Shares remain far below their pre-pandemic price levels. Yet, this recent rally may be yet another example of premature confidence in a comeback for this sector. Even if the current narrative plays out, the road to a full recovery remains many years in the making.

In short, there may not be enough room for more gains in the near term. Keep this in mind before jumping into this recovery play.

UAL Stock: Sentiment vs. Fundamentals

Admittedly, trying to assess airline stocks based only on fundamentals may not be the best move. Ignoring the overly bullish sentiment held by investors right now may result in missing out on some tremendous gains. Or worse, big losses, if you decide to bet against the crowd and go short this sector.

That is to say, airline stocks like United Airlines could continue to trade out of whack with fundamentals as long as we continue to see headlines touting a rapid travel economy recovery just around the corner. But, at some point, the cold, hard numbers are going to dictate price action for UAL stock.

What do I mean? Recent headlines may point to “pent-up demand” fueling a sooner-than-expected rebound for travel. But, more detailed analysis shows a full recovery remains years in the making. For example, ratings agency Fitch doesn’t see the sector getting back to pre-pandemic levels until 2024 at the earliest.

Meanwhile, United continues to contend with heavy losses as travel demand, as indicated from Transportation Security Administration (TSA) checkpoint travel numbers, still sits under where it was pre-outbreak. Yes, cash burn isn’t nearly as bad as it was when lockdowns were at their worst. But, with losses this year expected to come in at $9.52 per share, 2021 will be a transitional one as the company itself indicated when it released full-year 2020 results back in January.

Why Shares Could Pullback as Results Underwhelm

So far, it’s been general confidence in a travel economy recovery backing up the bull case for UAL stock. That’s been bad news for bears, who have lost out trying to go against the stock on the numbers alone. But, going forward, their thesis could start to play out.

How? The current narrative is that, after vaccines get distributed through the spring and early summer, things will start resembling the “old normal” again by the start of the second half of 2021. As more people feel comfortable getting back on planes, pent-up demand will mean stronger results for United Airlines, as well as for its rivals, such as American Airlines (NASDAQ:AAL) and Delta Airlines (NYSE:DAL).

Yes, this projected outcome could play out. But, even if this does happen, it’s still going to take years before financial results get back to their pre-pandemic high-water mark. This will limit how much further these stocks will climb. And, it could possibly result in a pullback as investors reassess valuations for the sector.

What does that mean for UAL stock? Based upon analyst consensus, United will return to profitability in 2022, with projected earnings of around $3.31 per share. Given that the price-to-earnings (P/E) ratio hovered in the high-single digits during better times, this isn’t going to be enough to support shares at today’s prices. This points to shares pulling back toward a more reasonable valuation.

Wait for More Reasonable Prices Before Buying United

Given analysis consensus for 2022, I believe $30 to $40 per share is a fair price to pay for United Airlines stock. But, I will concede results next year could come in at the higher end of analyst projections. With some on the sell-side predicting earnings of $6.50 per share in 2022, there may be enough on the immediate horizon to support the stock at today’s price levels.

But, another move higher, such as back to its pre-Covid-19 prices of around $90 per share? That may take years to happen. With the high chances UAL stock holds steady or even heads lower from here, wait for more reasonable prices before buying.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.  


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