2023-03-20 03:55:18 ET
Summary
- United Airlines has strong expected growth for the next 3 years.
- The valuation is attractively low, leaving plenty of upside potential for the stock.
- The recent sell-off creates an intriguing buying opportunity as travel demand returns to pre-pandemic levels.
United Airlines ( UAL ) has strong projected long-term growth along with an attractively low valuation. The recent sell-off for the stock creates a compelling buying opportunity. Air travel demand has been improving and exceeding pre-pandemic levels . This led to the return of profitability for United Airlines since the 2nd half of 2022.
Air Travel Demand Trends
Current trends show that consumers are spending more on experiences than material goods. This includes traveling to enjoy various experiences. Air travel demand was 3% in 2023 higher than 2019 or pre-pandemic levels. 52% of all Americans and 79% of leisure travelers plan to travel for leisure in the next 6 months.
Recent research found that spending on experiences provides more in-the-moment happiness than spending on possessions. This is probably one of the main drivers for strong air travel demand. Consumers may find that visiting family, friends, and various destinations by air travel provides great satisfaction, especially when memories and pictures of these experiences remain.
The global commercial aviation market is expected to grow at a strong pace of 7% to 8% per year to 2028. Domestic and international air travel is expected to grow during this projection period. Tourism which comprises 10% of global GDP is the main contributor to this expected growth.
United Airlines stands to benefit from these trends. The company stated in the recent JPMorgan ( JPM ) Industrials Conference Call that the outlook is strong for United. Revenue per available seat mile [RASM] is expected to increase in the near term. The company has visibility for Q2 2023 (April, May, and June) which is booked. United is projecting RASM to increase by the mid-teens percentage wise for Q2. The company missed Q1 guidance. So, United is probably being conservative for Q2 so that they meet or exceed projections.
UAL's CASM (cost per available seat mile) increased, but less than its competitors. United stated that it has confidence in the structural changes that are driving CASM all the way through 2026. If UAL is effective in managing costs, then the company could see margin expansion as revenue increases or possibly maintain lower cost increases as compared to its competitors.
United Airlines' Projected Growth
United is expected to achieve unusual strong growth for 2023 as travel demand returns to pre-pandemic levels. Overall revenue is expected to increase by nearly 18% and earnings are projected to rise by over 200% in 2023 as compared to 2022 ( consensus ). Of course, this is a result of travel demand being depressed from COVID over the last three years.
With that said, conditions look more normal after 2023. United is expected to grow revenue in the mid-single digit percentage range (5% to 6%) in 2024. Earnings are expected to increase by a strong 19% in 2024. Although it may be difficult to project further out, initial consensus estimates have United growing earnings at over 19% in 2025 and again at 19% in 2026.
Low Valuation
UAL is trading at about 4.2x expected EPS of $4.24 for 2024. The airline industry as a whole is trading at bargain levels with a forward PE of 6.23. In addition to trading below the industry average, UAL is also trading below Southwest Airlines ( LUV ), American Airlines ( AAL ) Delta Air Lines ( DAL ), which are trading with forward PE ratios of 7.88, 4.87, and 4.8 respectively.
United's low valuation leaves plenty of room to the upside for the stock. The negative effects of the pandemic negatively impacted the industry. However, current trends show a strong recovery for the industry. Therefore, United Airlines and its main competitors are likely to benefit over the next several years.
Technical Perspective
The daily chart above shows UAL's price declining recently as a result of the company stating that they will come in below expectations for Q1 due to labor charges and higher fuel costs. The good news is that WTI crude oil recently dropped to $66 after being in the $70 to $80 range for most of 2023. This could help drive down UAL's CASM.
The MACD indicator in the middle of the chart is showing a negative trend. However, the RSI indicator (the purple line at the bottom of the chart) is near an oversold area. The stock could be near the end of this drop and ready to turn higher. The negative outlook is only for Q1 which is almost over. Furthermore, United maintained its EPS guidance for the full year (2023) to be $10 to $12. This is higher than analyst estimates of $8.49. So, if the current positive trends that UAL is seeing for booking in Q2 continues, the stock is likely to recover from this recent drop.
United Airlines Investment Outlook
My overall thoughts are that the stock took an unjustified beating recently as a result of the company's lowered guidance for Q1. However, Q2 looks better as bookings are strong. Therefore, I expect the stock to recover from this near oversold level. The valuation is attractively low, leaving plenty of room to the upside for the stock.
The main risk for United is a possible recession as rising interest rates could tip the economy into decline. This could lower demand for travel as consumers reduce discretionary spending. Another risk is the potential for higher fuel costs. Unexpected supply constraints could drive fuel costs higher.
Currently, air travel demand recently exceeded 2019 (pre-COVID) levels. So, consumers are currently more comfortable traveling by air. There is probably pent up demand driving the market right now since many consumers postponed traveling during the worst of the pandemic.
Analysts have a one-year price target of about $62 for the stock (44% higher than the current price). This would take the PE to 7.3 based on analyst EPS estimates of $8.49 for 2023 or to 5.2 - 6.2 based on United's EPS estimates of $10 to $12. Either scenario keeps the PE attractively below 10, which looks reasonable.
For further details see:
United Airlines: Recent Sell-Off Creates A Buying Opportunity