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United Airlines Could Rise 34.9% Based on Its Historical Forward Multiples

United Airlines (NASDAQ:UAL) has had a rough year so far. UAL stock was at $40.62 as of midday Dec. 15, down slightly from where it ended last year at $43.25. This makes it down 6.1% so far year-to-date (YTD).

a United airplane flying through the sky

Source: NextNewMedia / Shutterstock.com

The stock is also down 14.4% year-over-year (YOY) from $47.46. Investors have been dumping the stock lately, as it previously reached a closing peak of $62.45 in the spring on Mar. 17.

Moreover, UAL stock even had a recent mini-peak on Nov. 8 when it reached $53.11. But since then, it has tanked by 23.5%, or $12.49 per share.

What United Airlines Stock Is Worth Now

However, that now makes UAL stock look very interesting as a potential value investment. For one, its outlook is not really all that bad. As of Dec. 15, 22 analysts surveyed by Seeking Alpha now estimate the company will make $2.22 in earnings per share (EPS) next year. That puts UAL stock on a cheap forward price-to-earnings (P/E) multiple of just 18.3 times.

Moreover, by Dec. 2023, analysts still see the company making a major rebound in EPS. That is because their average earnings forecast is $7.62 per share. This puts UAL stock on a forward multiple of just 5.33 times.

Historically, this is very cheap for UAL stock. For example, Morningstar indicates the forward P/E multiple for UAL on average has been 8.7 times over the last 5 years. Compared to its 2023 multiple of 5.33, this implies UAL is too cheap. To be equivalent to the 8.7 times multiple, the stock should be 63% higher.

However, first, we have to adjust the 2023 multiple. This is because it is two years out in the future. Assuming a 10% discount rate to bring this back to the present, the ratio would be 82.64% of that multiple, or 7.19 times.

Therefore, this implies UAL stock should be 34.9% higher. In other words, it is worth $54.75 per share. That’s 34.9% over its Dec. 15 price of $40.62.

This means UAL stock is very cheap on a historical basis. Our price target is based solely on the assumption that the stock will rise to its average forward P/E multiple. But it could also go higher than this. Over time, that tends to happen — especially when there is good news.

What to Do With UAL Stock Now

Analysts are now quite positive on UAL stock, assuming its earnings continue to rebound. For example, there are now seven analysts who’ve written on the company in the last three months, according to TipRanks. Their average price target over the next 12 months is $59.43 per share, or 43.8% over yesterday’s price. That is even higher than my price target of $54.75.

In addition, Seeking Alpha reports 22 analysts have made recommendations in the last 90 days. Their average price target is $58.40, which is even higher than the TipRanks average.

Knowing the market believes the company’s earnings are on the mend should give investors a good deal of comfort. Granted, some analysts are worried the omicron variant will cause some near-term headwinds for the airline as travelers stay away.

But this does not yet seem to be a full-blown travel panic, as occurred during early 2021. That period was one of the worst incidents to ever hit the airline industry, but it is not likely to be repeated any time soon.

As a result, this is a good time for value investors and those who are patient with their investment capital to begin picking up UAL shares. Granted, you may have to hold them for at least a year or so before the market becomes more positive on the stock. But the prospect of a minimum 35% return on investment (ROI) on your money — and much more if you believe Wall Street analysts — is well worth it.

On the date of publication, Mark Hake did not hold (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 InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2021/12/ual-stock-could-rise-34-9-based-on-its-historical-forward-multiples/.

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