2023-06-27 14:37:16 ET
Summary
- United Airlines Holdings, Inc. stock is consolidating before what I believe is going to be a big breakout.
- The company's fundamentals continue to improve in the face of strong consumer demand.
- United Airlines shares are far too cheap in my view, and once the breakout occurs, they should see a much higher valuation.
The massive resurgence in travel demand has seen the stocks of airlines and other travel-adjacent companies soar in 2023. Consumers have the cash - and the desire - to travel, and there are winners being crowned in the stock market all over the place.
One of those is United Airlines Holdings, Inc. (UAL), which appears to me to be on the verge of a massive breakout. I last covered United back in March, placing a strong buy rating on it at the time. It's up 21% since then, which is great, but I think there's more coming.
Breakout looming
United recently tested its highs for 2023, and with Monday's move up, is very close to breaking out. This chart looks tremendously bullish, and I think it's only a matter of time before we get the breakout over $55, and then it's off to the races. Whether that happens today or a few weeks from now is up for discussion, but I firmly believe the breakout is coming.
The moving averages are trending sharply higher, and the 20-day exponential moving average is well ahead of the longer 50-day simple moving average. The accumulation/distribution line is indicating sustained accumulation, which is a sign of buying throughout the trading day. The PPO has been trending higher since March, and showing no signs of slowing. The 14-day RSI looks similar.
The one caveat I have here is that the momentum indicators are showing signs of being overbought, so the stock may need a slight breather before the breakout. But whether that breather occurs or not, I see the end result as the same, which is a breakout higher.
One final piece here is relative strength, which has been outstanding this year.
The stock is 14% ahead of its peer group, and the peer group is 10% ahead of the S&P 500 (SP500). We're checking all the bullish boxes here.
It's no wonder the SA Quant Rating is showing nearly the highest possible value a 4.92, as the chart looks great. However, there's more to this story, and we'll dig into why the fundamentals look good, too.
Higher revisions, absurdly cheap stock
Let's start with the analyst community's outlook, which really couldn't be more bullish. Top line estimates continue to rise, as they have for the past three years in nearly a straight line.
Travel demand has continued to show resilience, and that's helped airlines with not only volumes, but pricing power as well. So long as these numbers keep going up and to the right, the stock should as well.
The company's CEO recently said demand was very robust from consumers, which is more than making up for lack of business travel. Early on in the pandemic, I was concerned about the airlines' ability to make up for lost business demand, but three years on, that appears not to be an issue. Consumers continue to spend their money on travel, and that means they need airlines.
The industry is facing a pilot shortage, but United intends to offer what it considers best-in-class terms to its pilots, and that it intends to "aggressively" recruit new pilots. With pilots being a bottleneck for supply from the airlines' perspective, if United is able to overcome that bottleneck, it should be well-positioned for 2024 and beyond.
EPS revisions are bullish as well, recently turning the corner as margins have improved over time.
While this chart is clearly not as bullish as revenue, the company's margins have been under pressure since the pandemic for various reasons. However, with revenue continuing higher, United's been able to leverage down buying costs and operating costs, creating more margin on each dollar of revenue. Margins are always volatile for airlines, and that isn't likely to change, but over time, United is trending in the right direction.
This is a look at quarterly operating margins, and we can see pre-pandemic, United was solidly in the low-double digits. Since then, it's been a different story.
However, the company is consistently profitable again, and as I mentioned, so long as revenue continues to move higher, margins should as well. This is particularly true with pricing power remaining strong, as it has been, and according to the company's CEO, should remain as such.
Valuation drives the bull case
A lot of times, we see stocks that have great charts and great fundamental stories, and then get to the valuation that leaves something to be desired. That's not the case here, as I find United's valuation to be extremely attractive.
In the run-up to the pandemic, UAL stock was trading in a range of 7X to 10X but today, is 4.9X times. Even if you believe the demand the airlines are seeing today, along with the pricing power it's bringing, is unsustainable, the stock is already priced for that and more.
Yes, the margin profile is not back to where it was pre-pandemic, and that's one reason for a lower valuation. However, if the CEO is right about sustained demand from consumers, it's only a matter of time before margins are right back near where they were.
The fact is that analysts believe revenue is going to keep rising, and EPS is going to keep rising. If that's the case, why is the stock trading at a massive discount to where it did pre-pandemic? I don't see a reason for that, and as such, I believe we're going to see at least 7X forward earnings as a starting point, and maybe more.
That would add $20+ to the share price, and after we get the breakout I'm looking for, that's exactly what I think will happen.
Risks to this include a sudden slowdown in demand and margin pressures. We've covered demand, but margin pressure can come from unions, fuel costs, maintenance costs, debt servicing costs, etc. Those things are generally pretty volatile, and that's not going to change. For that reason, it's possible we see continued margin volatility. But so long as we see operating margins sustain in the low-double digits (or better), this stock should be off to the races. I'm reiterating my strong buy on United Airlines Holdings, Inc. stock and see a big breakout coming soon.
For further details see:
Consider Getting Long United Airlines Stock Before It Breaks Out Higher