United Airlines (NASDAQ:UAL) has had a good year already in 2021. As of Mar. 8, UAL stock is up over 25% year-to-date (YTD) and up 4% or so in the past one year. This is despite all the turmoil the company has had to go through, including dilution from several capital raises.
In fact, the company just announced it is going to raise money by issuing another 37 million shares. With UAL stock at around $54 per share on Mar. 8, United Airlines could raise $1.99 billion.
This would add significantly to its $19 billion in liquidity (Page 42). This includes undrawn revolver capacity and funds available under the CARES Act loan program from the U.S. Treasury.
UAL Stock: Cash Burn and Liquidity
United Airlines announced on Jan. 20 that its daily cash burn was $33 million, which includes $10 million in principal debt repayments (Page 4). Therefore, in a typical 91 day quarter, the total cash burn will be $3.003 billion.
On Mar. 1, United Airlines filed its 10-K for the year ending Dec. 31, showing it had $11.6 billion in cash and securities then. Therefore, at its $3 billion-per-quarter cash burn, the company will run out of cash (not liquidity) before the end of one year.
That could be one reason why United is raising cash by selling common stock now that UAL stock is close to a peak. This provides additional insurance in case the recovery or turnaround in its fortunes doesn’t happen as soon as expected.
For example, UAL is no longer providing longer-term cash-burn forecasts. The company simply said that its liquidity will be $19.7 billion by the end of Q1. That is essentially the same as at the end of the December. It’s also less than 30 days from now, but indicates that the company is not willing to go out very far in its forecasts.
In addition, United expects to see cash burn lower through “at least $2.0 billion” in cost reductions going forward. This is after it identified $1.4 billion in core cost savings over the past year. This might imply that its Q2 cash burn could be lower than $33 million per day.
What Analysts Say About United Airlines
The Wall Street Journal reports that 8 analysts now have UAL stock as a buy, up from 7 analysts a month ago and three months ago. The average price target of these analysts is $49.52. That represents a decline of about $4 from the price on Mar. 8, or a drop of 7.9%.
Similarly, Marketbeat.com indicates that 19 analysts have a consensus price target of $47 per share. That represents a drop of 12.9% from its price on Mar. 8 of about $54.
Yahoo! Finance has a similar price-target range. They indicate that 19 analysts have an average target of $50.79 — a 5.9% drop from today’s price.
So, essentially most analysts do not think UAL stock has more to go. They must believe that most of the good news, in terms of expected recovery, is already priced into the stock.
Recently, one analyst in Seeking Alpha did a detailed analysis of United Airlines and its issues. He came up with a figure of $50 per share as its ultimate value. As you know, UAL stock is already well over that price.
What to Do with UAL
In essence, UAL stock is at a price today where the good news is already in the stock. So, investors might want to wait to get in at a lower price or to lower their average cost if they already own the stock.
The truth is that better news in relation to the pandemic has been pushing UAL stock and other airlines higher. Moreover, UAL has a higher percentage of its flight departures to international locations. This sector of airline travel has been hurt the worst of all. That implies that, when travel comes back, United Airlines could have the strongest turnaround.
Therefore, hang in with this stock if you already own it and look to buy it on weakness if you don’t.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
