Upside Likely for UAL Stock
United Continental Holdings Inc (NYSE:UAL) has started to rebuild its value. So far this year, UAL stock has gained 4.5% and the momentum is in its favor. UAL stock suffered because of the higher U.S. dollar and potential labor issues. Now, 13 analysts maintain a median 12-month price target of $73.00; that’s a 24% upside. The highest analyst price target is $92.00. (Source: “Analyst Opinions United Continental (UAL) Analyst Opinion,” Zergwatch, March 30, 2016.)
A strong dollar affects an airline with a large international presence such as United because the company generates considerable revenue beyond domestic borders. This revenue is then worth less in the United States.
But UAL stock has better days ahead. It has risen sharply since mid-February from a $45.00-per-share range to the current $60.00 range. Just a few weeks ago, it was trading at around $57.00.
After an illness, Oscar Muñoz has assumed his CEO role for United, replacing Brett J. Hart, who led the company in his absence. Muñoz has considerable experience in transportation and in turning companies around. At CSX, he became a leader in customer focus, reliability, and financial performance. At United, Muñoz will focus on increasing earnings and improving customer service. United Continental needs both. Indeed, China Eastern airlines have recently launched a new direct service between Beijing and Chicago, a major UAL hub.
More importantly, Oscar Muñoz enjoys unprecedented support from UAL’s employees. The latter have blocked efforts from Altimeter Capital Management and PAR Capital Management, two hedge funds that own a combined 7.1% of United, to appoint six new directors to United Continental Holdings’ board. The employees have interpreted this as a hostile effort that would weaken Muñoz’s actions to improve UAL. (Source: “United board insurgents: ‘We are not seeking control of the company’,” Air Transport World, March 23, 2016.)
This move suggests that UAL’s new executive wants to focus on long-term growth, which makes UAL stock stronger. The pilots, backed by mechanics and ground staff, in their words, accuse the hedge funds of wanting to “raid the corporation.” (Source: Ibid.)
Investors should also take the side of the pilots, who want to see Muñoz succeed. Indeed, as COO of CSX, he did manage to increase top-line revenue and earnings, and ensure a return on investment to stakeholders. (Source: “Here’s why Oscar Munoz made the surprising move from CSX to United Airlines,” Jacksonville Business Journal, September 15, 2015.)
Muñoz’s return is already felt. United Continental has taken the unusual step of launching a seemingly odd route: direct service from San Francisco to Tel Aviv in Israel. The Boeing 787 makes it possible to operate this flight, which will address demand between two of the world’s top computer technology hubs. (Source: “Wheels up: SF techies get direct flight to Israel,” CNBC, March 30, 2016.)
The new “techy express” route is part of a wider overhaul strategy for the airline. One of the central pillars of the renewal is UAL’s new multi-year partnership with Air China. The two companies will strengthen their coordination. Travelers will benefit from more flight opportunities between China and the U.S. The two carriers will conduct joint marketing and coordinated operations in the United States and China, which is the world’s fastest-growing aviation market.
United Continental is also expanding its domestic service. The company has just ordered 25 additional “737-700” jets. United had already ordered 40 Boeing 737s last January.
United Continental Holdings was born in May 2010 from the merger of United Airlines and Continental. It is the third-largest U.S. airline in revenue, behind American Airlines and Delta Air Lines.