Don’t Give Up on UAL Stock?
United Continental Holdings Inc (NYSE:UAL) has lost almost 18% year-to-date. Yet, UAL stock has benefited from some strong sessions recently.
The next big date for UAL stock investors will be around July 28. That’s when the airline will announce its next quarterly results.
United Continental has shown a tendency to perform above expectations. In the last earnings report, United beat the Zacks consensus estimate by posting earnings of $1.23 per share, which was rather better than the $1.17 analysts expected. (Source: “United Continental Holdings, Inc. (NYSE:UAL): Company Earnings Review,” Franklin Independent, May 10, 2016.)
The long-term outlook on UAL stock is even more bullish, considering that most analysts recommend it as a “Strong Buy,” according to Zacks. The optimistic indications are all the more remarkable, considering they come as United’s traffic was slightly lower in April. The consensus price target is $66.57, with the most optimistic target peaking at about $83.00 per share. Better yet, perhaps, is that the most pessimistic analysts have set a price target of $54.00, approximately 20% higher than the stock’s current valuation. (Source: “United Continental’s April Traffic Falls, PRASM View Intact,” Zacks, May 10, 2016.)
The optimism on UAL stock may be related to the airline’s aggressive strategy to build traffic in China, the world’s fastest-growing market for air travel. On May 8, United started serving direct service to Xi’an from San Francisco, the first for any U.S.-based airline. Xi’an should draw traffic from business people and tourists alike, making it a highly desirable destination. Investors should not underestimate the impact of the new route.
The Xi’an route can draw on the growing role that city is playing in the Chinese industry and tourism, feeding more connecting traffic for United from San Francisco. The new route is also one of the main drivers—if not the main driver—of United’s strategy, including joint marketing and operations with its partner Air China. Routes between the United States and China are seeing the highest growth in the aviation market.
UAL has not neglected domestic operations either. It has several new Boeing “737s” on order to help expand routes within the continental United States.
Starting last April, United began to operate according to a different traffic model. And it’s one that may be more profitable, as it favors international traffic, which allows for better margins. (Source: “US airlines deploy widebody aircraft on long haul services, reclaiming their global roles,” Centre for Aviation, March 29, 2016.)
United still indicates lower second-quarter 2016 consolidated passenger unit revenue by 6.5% to 8.5%, especially due to a strong U.S. dollar. However, the low fuel prices should help compensate for the currency risk. (Source: “United Reports April 2016 Operational Performance,” Sys-Con Media, May 9, 2016.)
Finally, United stock dropped considerably toward the end of May, absorbing much of the negative sentiment largely owing to fears of the high dollar impacting traffic. United is one of the leading U.S. airlines operating in South America. Weaker economic conditions there, especially in Brazil, have lowered expectations.
Still, at the current price, United stock is relatively cheap and below all consensus estimates, making it a potential bargain.