2023-04-20 11:02:17 ET
Summary
- United Airlines results showed little to no surprises.
- Airline expects a strong second quarter as international flights carry the last phase of the airline recovery.
- United Airlines stock is significantly undervalued at current prices.
United Airlines ( UAL ) reported earnings before the opening bell on Wednesday and shares took off ending the day 7.5% higher. Previously, I haven't been extremely thrilled with the way United Airlines used the earnings call to pitch investment in its stock as I strongly believe management should use those call to focus on its results and the business environment. If they do that well, the investment will come. Since United used its earnings call last year to pitch investment in airline stock, its share prices lost 11% compared to a 5.3% loss for the stock market. So, there is a good reason to not engage in utilizing earnings calls as marketing machines, and perhaps they have also understood that, as its most recent earnings call was less focused on pitching investment in airline stock.
In this report, I will be analyzing the Q1 2023 results, the Q2 2023 outlook and provide a valuation for United Airlines stock.
United Airlines Beat Expectations
The YoY growth numbers for revenues are impressive with a 51.1% growth. A few items, however, should be kept in mind and that is that the comparable period last year was affected by weakness due to the Omicron variant. Furthermore, we see weakening in cargo revenues which is driven by normalization in freight capacity globally as international networks are recovering, but also because macroeconomic uncertainty is putting a damper on demand. Passenger revenues were up 61.8% driven by international revenues more than doubling on 36% higher capacity while domestic revenues increased 43.8% on 15.8% higher capacity.
I covered United Airlines prior to its earnings release and discussed the company's guidance as well as analyst projections. The company had guided for 51% higher revenues and capacity to increase by 23%. For TRASM (total revenues per available seat-mile), United guided for a 22 to 23 percent expansion. With capacity up 23.4%, revenues up 51.1% and TRASM up 22.5%, United delivered on its revenue and capacity guide while revenues were in line with the analyst consensus.
Total costs rose by 28.3% slightly higher than capacity expansion due to higher fuel prices, maintenance activities as more airplanes are brought back to service and incorporation of cost related to the new labour agreements. As a result, unit costs declined by only 0.1% excluding fuel, which was at the higher end of the guided range of flat to minus 1%. United Airlines reported a $0.60 loss per share or $0.63 on adjusted basis compared to a loss estimate of $0.73 by analysts.
So, overall United Airlines exceeded analysts' expectations on earnings levels despite higher fuel costs and labor cost pressures. The airline once again highlighted changing demand patterns were peak-season sees higher growth/recovery than the off-peak months. Furthermore, business travel is recovering nicely with an 85% to 97% revenue recovery in Q1 and that is despite a two week dip in demand following the turmoil in the banking sector .
Q2 Outlook: International Expansion Drives United Airlines Growth
For the second quarter, United Airlines expects to be profitable as capacity increases. Interesting to note is that total operating revenues will not grow in line with capacity growth but that is because other revenues beyond passenger revenues are incorporated in the total and I would expect cargo revenues to come down as unit revenues moderate.
The revenue expansion will be driven by 8 to 10 percent higher domestic revenues and 30% higher international revenues as United expands its international capacity at twice the rate of the domestic revenue expansion. That means that domestic revenue will be in line with the growth rate of 10% and actually somewhat lower while international capacity should grow 20% while achieving revenue growth of 30% indicating strong international RASM.
Also important to note is that United Airlines sees little to no impact on its summer operations due to the problems with the Boeing ( BA ) 737 MAX which will result in 45-50 fewer deliveries for peak travel season. The negligible impact is likely driven by the fact that United also operates the MAX 9 and at 45-50 fewer deliveries for the entire customer base the impact for United specifically will be small and even smaller when measured against its domestic fleet.
Is United Airlines a Buy or Sell?
Valuation United Airlines | |
Market Capitalization [$ bn] | $ 15.2 |
Total debt [$ bn] | $ 38.6 |
Cash and equivalents [$ bn] | $ 17.2 |
Total Enterprise Value [$ bn] | $ 36.6 |
EBITDA TTM [$ bn] | $ 6.3 |
EV/EBITDA | 5.8x |
Current price | $ 46.27 |
Price target | $ 66.45 |
Upside | 44% |
United Airlines seemingly has significant upside. Using the current market capitalization of $15.2 billion, adjusted debt of $38.6 billion and $17.2 billion in cash and marketable securities, we get an enterprise value of $36.6 billion. The twelve-month trailing EBITDA is $6.3 billion bringing implying a 5.8x EV/EBITDA multiple. Measured against a median multiple of 8.3x, that would imply that right now United Airlines stock should be trading 44% higher.
An alternative calculation uses the current enterprise value, but for the EBITDA we use the EBITDA margin expectations as well as the revenue consensus for 2023 , which is $52.9 billion. That would bring us to a $7.5 billion EBITDA for 2023.
Valuation United Airlines | |
Market Capitalization [$ bn] | $ 15.2 |
Total debt [$ bn] | $ 38.6 |
Cash and equivalents [$ bn] | $ 17.2 |
Total Enterprise Value [$ bn] | $ 36.6 |
EBITDA 2023 [$ bn] | $ 7.5 |
EV/EBITDA | 4.9x |
WACC | 5.7% |
Current price | $ 46.27 |
Price target | $ 73.94 |
Upside | 60% |
Doing the same calculations and using EBITDA as a proxy for cash flow applying a discount rate of 5.74%, we get to a price target of 73.94% representing 60% upside.
Wall Street has an average price target of $61.83 for United Airlines stock representing 33.6% upside. Obviously, there are various ways to calculate price targets and to incorporate risk and even an EV/EBITDA method has elements that various analysts can make different assumptions on such as the actual EBITDA or the EBITDA multiple that needs to be applied. Nevertheless, with a price target of $66.45 reflecting the TTM EBITDA I feel comfortable and I believe if United Airlines is able to deliver on analyst estimates, the twelve month price target offers 60% upside
Conclusion: United Airlines Stock Offers Significant Upside
United Airlines Q1 2023 results offered little to no surprises and I would say that is a good thing. The company continues to see a strong 2023 ahead and its guidance incorporates some padding as strong corporate travel demand is not incorporated in the revenue outlook for the quarter. So, there is some padding for the second quarter in case demand or pricing suddenly comes under pressure. If that is not the case, it might very well be a driver to beat the Q2 guidance.
Looking at United Airlines stock, I have not always been charmed by the way they do things such as pitching airline stock investment during an earnings call and a late update on their wide body fleet , but I do see significant upside for the stock.
For further details see:
United Airlines Stock: Major Upside On International Travel Growth