2023-09-28 12:00:00 ET
Summary
- United Airlines investors have suffered significant losses as the stock plunged nearly 30% from its July highs.
- The sharp recovery in oil prices has impacted the airline industry, as investors fear the worst is not over for UAL and its peers.
- Despite the escalating headwinds, I'm confident that UAL's March lows should be defended, suggesting a highly favorable risk/reward upside as it closes in against that level.
- I argue why UAL's best-in-class quant grades for profitability, growth, and valuation bolster my conviction about a subsequent recovery.
- When others bail out as they take in the scary narrative in the financial media, astute investors ignore the noise and focus on objective metrics.
United Airlines Holdings, Inc. (UAL) investors have been hammered over the past two months after UAL topped out resoundingly in July, following the release of its second-quarter or FQ2 earnings scorecard.
As such, astute sellers have likely leveraged the early summer rally on leading airline stocks like UAL, drawing late buyers into a remarkable bull trap (false upside breakout) before digesting those gains. Accordingly, UAL has plunged, declining nearly 30% from its July 2023 highs, stunning these buyers. Given the extent of the losses, I believe weak holders likely capitulated as UAL gave up all its summer gains and more, falling to lows last seen in mid-April.
As such, I believe it's opportune for me to provide an update for airline investors on whether it's timely for them to try and catch the falling knives. I will also explain the critical levels to watch if the downside volatility were to worsen, causing more holders to flee to the hills.
Bearish prognosticators would likely allude to the significant recovery in oil prices over the past three months that undoubtedly stunned the airline industry. However, while airline executives were probably taken aback by the resurgence of the energy market ( CL1:COM ) ( CO1:COM ), I had already anticipated the sector ( XLE ) recovery since March 2023, when I upgraded the sector amid the regional banking crisis. Hence, the rally didn't surprise me, as energy dip buyers were assessed to have "quietly" accumulated before the momentum investors caught hold of the recovery thesis and joined the bandwagon.
United management was likely surprised as it issued a guidance update in early September. Ex-CFO Gerald Laderman presented the update in a September conference, emphasizing that "fuel prices have surged" after United's FQ2 earnings update in July. As such, management adjusted its fuel outlook for Q3, raising its midpoint guidance by more than 13% from a midpoint of $2.65 to $3.
Notwithstanding the fuel price headwinds, United maintained its outlook on capacity, revenue, and CASM, suggesting the impact isn't expected to be structural on its operating performance.
S&P 500 Passenger Airlines net earnings revisions % (Yardeni Research)
Despite that, industry analysts have already reacted to the guidance updates , as they marked down their estimates for the industry. As seen above, analysts now expect positive forward net earnings revisions of just 2% in September, down from 20% in August, a significant downtick.
United's Q3 and full-year estimates have also been revised. Accordingly, analysts expect United to post a full-year adjusted EPS of $10.62, below the previously upgraded midpoint guidance of $11.5. As such, I'm not surprised about the steep decline in UAL from its July highs as the market attempts to price in these headwinds.
To compound matters further, a potential government shutdown could also worsen the shortages of air traffic controllers, potentially "disrupting air travel." Investors worried about these challengers could also have cut their exposure, assessing a political resolution before considering returning.
UAL Quant Grades (Seeking Alpha)
However, investors must consider that UAL's quant grades are still highly constructive, suggesting that such headwinds have likely been priced. Seeking Alpha Quant assigned UAL with best-in-class "A+" grades for valuation, growth, and profitability. As such, I believe the favorable ratings corroborate my assessment.
UAL price chart (weekly) (TradingView)
As seen above, UAL's decline is assessed as a capitulation as it closes in against its March lows ($40 level). Momentum buyers likely threw in the towel when UAL lost its 50-week moving average or MA (blue line) decisively about three weeks ago.
As such, UAL has suffered relatively significant damage as it fell steeply into a bear market. Although I have not gleaned a robust bullish reversal at the current levels, I'm confident that UAL's March lows should be defended firmly.
With the risk/reward profile favoring buyers at the current levels, I'm optimistic about UAL buyers returning subsequently to stem the decline and form a consolidation zone for further accumulation.
Rating: Initiate Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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United Airlines: When Others Give Up, Dip Buyers Load Up