Summary
- United's margins should recover this year as energy prices moderate and air travel levels return to pre-pandemic levels.
- United's massive aircraft purchases should position the company very well for the long-term, and current flight restrictions imposed by Russia are likely only short-term challenges.
- This stock looks cheap using several metrics.
The Airline industry has faced some uniquely tough times over the last fifteen years. The major US carriers were forced to request bailouts after the 2008 financial crisis and the huge spike in oil in the aftermath of the recession that subsequently occurred. The US Airline industry also received needed bailouts after Covid hit the US in 2019 as well.
United Airlines ( UAL ) has been at the center of all of these recent events. United is the fourth largest airline in the United States, behind Delta, American, and Southwest. United's stock performed very well between 2008 and 2019, but the company again sold-off hard after Covid hit and travel restrictions were imposed worldwide.
Today, United's stock is a buy. The company is making significant aircraft purchases to position the carrier very well over the long-term, energy costs should moderate from the levels seen in 2022, and analysts are also expecting air travel to return to prepandemic levels in 2023. Travel restriction on United and other US carriers flying over Russian airspace that are restricting the company's flights to India and China aren't likely to remain in place long-term either.
United's stock significantly outperformed the S&P 500 after the financial collapse of 2008 prior to the pandemic in 2019. Between 2008 and 2019 United's stock was up 243%, while the S&P 500 was up just 80% during that 11-year period. While United and the other major US carriers required government assistance in 2008 and 2020, the financial collapse and the global pandemic in 2019 are likely to be once in a generation events.
United is taking several actions that should position the company very well long-term, and the company's below average margins should be seen as part of the short-term cost of positioning the company for the future. United is upgrading the company's ageing fleet right now, and management is spending massively on both replacing and adding new planes. Management at United recently announced their order of 100 twin-aisle Dreamliners, with an option to purchase another 100 more.
This is the largest purchase of widebody aircraft by a US carrier in history. United will obviously have elevated expenses in the short-term to finance these purchases, but with air travel numbers expected to exceed prepandemic levels in 2023 and grow over 5% moving forward, these capital expenditures should provide significant benefits long-term. The recent labor agreement between Delta and the company's unions should also provide framework for United to resolve their labor disputes as well.
United has also been hit harder than some of its peer by rising energy costs since the company no longer hedges oil prices. United stopped hedging energy costs after these trades caused the company to lose billions after 2008. Right now, energy costs remain elevated, but oil has still come down significantly from the highs of around $120 a barrel crude reached in the immediate aftermath of the Russia-Ukraine war. Today, oil trades at $75 a barrel, and since new supplies have come online since Russian crude exports dropped over the last year, the market isn't likely to see $120 oil anytime again soon.
United's adjusted operating margin of 5.71% and the company's net margin of 1.64% are significantly lower that the company's ten-year averages. United's net margins have been 6% or higher for most of the last ten years. With oil prices likely to be much lower in 2023, and experts predicting air travel levels this year should be close to prepandemic levels in 2019, United's margins will likely be much stronger next year.
The third main factor that has negatively impacted United in the short-term that shouldn't be an issue over the long-term has been the impact of the Russia-Ukraine conflict on the company's routes in China and India. United has been very limited in how they can fly from the US to China and India since Russian airspace is restricted to US carriers. While the Russia-Ukraine conflict may persist for some time, United should be able to increase their presence in India and China over the long-term. Russia and Ukraine may continue fighting for several years, but this conflict isn't likely to significantly impact United's ability to fly to China and India over the next decade.
This is why United Airlines stock looks cheap using several metrics. United currently trades at just 6x forward earnings estimates for this year, .71x forward sales estimates, and 5.12x forward EBITDA estimates. The airline industry average is 17x forward earnings estimates and 11.24x forward EBITDA. United also trades at just 1.85x forward book value, which is below both the airline industry average of 2.49x book value, as well as United's 5-year average of 2.4x book value.
The Airline business has always been a cyclical industry. Still, the financial collapse of 2008 and the 2019 pandemic were likely once in a generation events. Today, United Airlines has very strong balance sheet with $16.41 billion in cash and operating cash flow of $6.07 billion. The company is also positioning well for the long-term massive new aircraft purchases. While higher costs to finance these upgrades and the impacts of the Russia-Ukraine conflict is hurting the company's margins in the short-term, the long-term outlook for United is bullish.
For further details see:
United Airlines: Buy, Good Times Are Likely Ahead Despite Some Near-Term Challenges