The steep drop in demand for plane tickets amid the outbreak of the novel coronavirus had been expected for some time. But after United Airlines (NASDAQ:UAL) stock lost over 65% of its value in the last quarter, value investors should ask if the shares have become attractive at this point.
Trading at a trailing price-earnings multiple of 2.7 and a debt-to-equity ratio of 1.29, UAL stock is already cheap. The bigger question is how much longer United Airlines, which lost over $100 million per day in March, can survive.
Waiting it Out
United Airlines said that it is “estimating for planning purposes a reduction in revenue of at least 30% for the fourth quarter of 2020 compared to the prior period.”
But the 80% capacity reduction that the airlines implemented in April will slow its cash burn rate. At the end of 2019, the company had $4.94 billion of cash, and its net debt stood at $15.5 billion. So the $25 billion of cash that the government gave to the nation’s airlines should enable United to survive until Sept. 30, 2020.
United may wait out the steep drop in passenger traffic as it accumulates losses. But investors holding UAL stock could get wiped out if the lockdowns persist for months beyond that.
Even if the stay-at-home orders are lifted, many customers may still avoid traveling. In Wuhan, China, the epicenter of the outbreak, thousands of Chinese citizens left the city by train after the government lifted its travel ban. Yet chances are good that Americans will not travel much due to fears of the virus re-emerging.
Flights Cancelled
To further match the dwindling demand for flights, United cut nearly 90% of its flights to New York City’s metropolitan area. The airline will probably carry out more cargo flights while transporting fewer people, helping to offset some of its lost business in the near-term. It also cut its flights to California due to weaker demand. Starting this week, it will offer 13 flights per day from Los Angeles’ main airport, down from 33 daily flights previously.
The huge reductions in airlines’ revenue raises the risks of holding UAL stock. Investors can only guess when airlines’ shares have bottomed.
Conversely, the U.S. government’s recent indications that it’s willing to end the lockdown have increased the chances of airlines’ business rebounding.
Also, United has added cargo-only flights to Asia. After expanding its presence in Beijing, Chengdu {another city in China} and Taipei, the airline is delivering urgent personal protective equipment to the hospitals in those cities that need it most.
In May, United Airlines is looking to resume its international flights, including flights between Chicago to London. It also plans to resume flights to South America.
Looking ahead, investors should expect the airlines to report steep quarterly losses. And without any forward guidance, uncertainty is likely to continue to weigh on UAL stock. Sentiment towards the shares is so weak that United has a momentum score of just 19, as shown in the chart below.
Data Courtesy of Stock Rover
But in spite of the shares’ underperformance, Stock Rover gives UAL stock a valuation score of 96, since its P/E ratio is near its lowest level in five years.
The Bottom Line on UAL Stock
United’s shares could dip sharply again in coming weeks, and its lack of operating cash flow is certainly a concern. But with government support and lenders’ agreement to defer its interest payments, the company should survive. And once travel resumes in a few months, the stock’s valuations can climb.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
