UAL stock is valued at nearly $60 per share. That’s a market cap of $19.2 billion on fiscal 2020 sales of $15.4 billion, but 2019 revenue of $43.3 billion. In 2019 the company took almost 7% of its revenue to the net income line.
The problem is that while Southwest’s recovery looks like a done deal, UAL remains in a dicey position. Analysts expect a loss of nearly $2 billion, $6.76 per share, in the first quarter report due April 19. The airline has cash to survive that loss, and four more like it, but big returns look far away.
A Deeper Dive
When a stock’s dive is deep, its recovery can look great until you look under the hood.
United still has a debt problem. While Southwest could, in theory, cover its long-term debt with a check, United has twice as much debt as cash, even when capitalized leases are taken out. United nearly doubled the debt load during the pandemic.
Even with some of that debt forgiven, that still costs money. Its debt was recently rated at Baa2, and its bonds carry a coupon of 4.875%. It will likely pay $1.2 billion on that debt this year. With net operating cash flow of $4 billion in the “normal year” of 2019 that’s a serious burden.
Speculators have been rushing in, however, since the airline told the Securities and Exchange Commission it was probably cash flow positive in March. This came after it burned through $19 million per day in the fourth quarter. UAL stock is up almost 18% over the last month against a 12.6% gain at Southwest.
A Steeper Recovery?
Gains from here depend on United returning to profitability.
CEO Scott Kirby, who took the reins last May, has been trying things to bring profits closer. He even committed to 25 new Boeing (NYSE:BA) 737-MAX planes and is taking early delivery on other orders. The airline is trying to generate goodwill by continuing to offer flexible bookings so customers can change or cancel flights.
The problem with these moves for investors is that United, unlike Southwest, lacks credibility with stakeholders. An effort to outsource its food service was met by protests in Congress, which had approved the 2020 bailout. An effort to get real-time customer feedback drew pushback from flight attendants. Then there was the engine that blew up on a flight leaving Denver in February.
As a result, analysts remain narrowly divided on UAL stock, with just seven of 14 saying buy, one saying sell and the rest in the hold category. Their average price target sees no gain from its current price.
The Bottom Line
United has bigger risks than Southwest but promises bigger rewards if the recovery gains steam.
If the pandemic is ending in the U.S. and demand comes rushing back, then UAL stock is positioned to rise faster than that of other airlines, as our Tom Taulli wrote recently. The company’s options chain shows a lot more optimism for prices in the low $60s than bets it will fall through the high $50s.
To me this says UAL might make a nice trade. You can make some money betting on small moves upward. But I wouldn’t invest in UAL stock for the long term, where a stronger balance sheet is a better bet.
At the time of publication, Dana Blankenhorn owned no shares, directly or indirectly, in stocks mentioned in this story.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.