Discounted United Airlines Stock Is an Excellent Airline Recovery Play

United Airlines (NASDAQ:UAL) continues to march forward with purpose as the travel sector recovers. The network airline outperformed expectations in its second-quarter results and is incredibly optimistic about the upcoming quarters. Moreover, it plans to grow and optimize its fleet to reduce inefficiencies and improve profitability. Meanwhile, UAL stock is still priced as if the sector is in a major crisis, which points to substantial upside at this time.

The side of a United Airlines (UAL) plane with "united" written above passenger windows. Represents airline stocks.
Source: travelview /

After gaining near 40% in the first five months of the year, UAL stock has sold off since early June, shedding almost 22% of its value. Hence, the bearish sentiment surrounding the stock is persisting.

The recent share price shows discounts on several metrics, including price-to-book of 3.11x and price-to-sales of less than 1x.

Analysts’ estimates suggest that the stock has almost 30% upside from its current price. Hence, it is trading at a deep discount, which is a situation that could change fast. Let’s take a more detailed look into United Airline’s encouraging performance and outlook.

Recapping Second Quarter Results

United Airlines reported its stellar second-quarter results in July. Its revenues topped $5.47 billion, representing an almost 270% increase on a year-over-year basis. Moreover, the network airline was able to reduce its EBITDA loss to $585 million. The company attributed its top-line success to the robust recovery in business travel and long-haul international travel.

Despite the improvement, it posted a massive quarterly adjusted pre-tax loss of $1.6 billion. However, under the generally accepted accounting principles (GAAP), the loss would be at least $500 million lower. It does include a $1.1 billion government payroll grant benefit which is set to expire in September.

What’s more impressive is United’s forward-looking guidance for the rest of 2021. For the third quarter, the airliner expects unit revenues to rise in line with 2019 levels. Shorter flights are boosting unit revenues substantially but are driving up unit costs as well. However, United’s return to unit sales growth would be nothing short of amazing.

Moreover, despite the increase in fuel prices, the company expects to record its first adjusted pre-tax profit since 2019 in the upcoming quarter. Additionally, the company will be posting another profit in the following quarter as well. Interestingly, analysts believed that United would continue losing money for the whole of 2021.

Fleet Optimization Plans

United Airlines plans to optimize its aircraft fleet to reduce operational inefficiencies by 2026. The goal is to retire more than 200 single-cabin regional jets, replacing them with larger Boeing (NYSE:BA) 737s. It currently has the lowest North American gauge at 104 seats. The larger fleet will allow the airliner to fly more capacity on feeder flights.

United is aiming at reaching 134 seats per departure by 2026. Moreover, it will add 75% premium seats on short-haul departures and reduce costs by 8% per available seat mile (ASM). The company announced an order of 270 aircraft to increase its gauge of flights in mid-continent hubs such as Houston and Denver.

The airline targets more seats per flight due to the limited growth in coastal centers such as San Francisco and New York. United already has existing orders worth close to $15 billion on the books. The carrier understands the shortcomings that have weighed in on its financials in the past and is committed to tackling these issues head-on with its expansion plans.

Final Word On UAL Stock

United Airlines has been on a roll of late with its incredible top-line growth, reassuring outlook and expansion plans. Management is upbeat about its prospects this year’s last couple of quarters, expecting healthy profits.

However, UAL stock continues to move sluggishly despite the recent positives. There is a hefty upside in investing in this stock, as it trades at a considerable bargain.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.

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