United Airlines Stock (NASDAQ:UAL): Up 55% YTD but Still Significantly Undervalued
Stock Analysis & Ideas

United Airlines Stock (NASDAQ:UAL): Up 55% YTD but Still Significantly Undervalued

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Is it possible to say that a stock isn’t getting much credit from investors when it’s up 55% year to date? In the case of United Airlines, yes, it is.

United Airlines (NASDAQ:UAL) knocked the ball out of the park on its earnings call earlier this week, reporting record quarterly earnings and beating analyst expectations across the board. The stock is now up about 55% year-to-date. However, the reality is that the stock is not yet getting much respect from investors, which means shares could have plenty of room to fly higher. I’m bullish on UAL stock. Here’s why.

Unbelievably Cheap Despite a 55% Gain Year-to-Date

United has had its share of negative press in recent years. Whether it was the high-profile customer service incident where a passenger was roughly removed from a flight in 2017 or the numerous delays due to weather and operational challenges that many customers at United’s Newark hub have suffered through this summer, the company has found itself in the limelight for the wrong reasons several times. 

The company certainly has its PR issues to contend with, but it’s honestly hard to find many publicly-traded companies that are cheaper than United Airlines from a valuation perspective. United trades at under 5.4 times forward earnings for 2023 and is even cheaper when looking at 2024 estimates, trading at under 5.0 times consensus earnings.

However, based on its blowout quarter and the strong demand it forecasts going forward, United just issued updated adjusted earnings guidance for the rest of 2023 of $11-$12 per share. Using the high end of this guidance, the stock looks like even more of a bargain trading at about 4.8 times adjusted 2023 earnings.

It’s hard to think of many sectors where stocks typically trade at cheaper valuations than this, outside of perhaps a few coal miners, steelmakers, and auto manufacturers. Keep in mind that this valuation comes after the stock has rebounded more than 80% off of its 52-week low, and you’ll get an idea of just how negative sentiment towards United has been.

It feels strange to say that sentiment is negative or that a stock is “hated” when shares have been on a tear like this. However, United’s current valuation makes it clear that this is not a stock that is getting much respect from investors just yet. The good news is that this means that shares should have more room to run as the company continues to perform and as investors start to believe more in the durability of its results because further success doesn’t appear to be baked into the stock price at this point.

United trades at a significant discount to the S&P 500 (SPX), which currently trades at 20 times earnings. Shares also trade at a discount to Delta Air Lines (NYSE:DAL), which trades for roughly 6.8 times forward earnings. Furthermore, United also offers a steep discount versus the valuations of some of the more prominent budget airlines, like Southwest Airlines (NYSE:LUV) and Allegiant Travel Company (NASDAQ:ALGT), which trade at much more expensive valuations of 13.5 and 12.5 times forward earnings, respectively.

The company even looks like a bargain based on its price-to-earnings growth (PEG) ratio of about 0.15. Investors use the PEG ratio to try to balance a stock’s earnings growth with its valuation and generally consider a PEG ratio of under 1.0 to signal that a stock is undervalued.  

United Airlines has its challenges and issues, but at this rock-bottom valuation, it seems reasonable to say that the risk-reward ratio is skewed heavily in favor of reward at this point. 

Firing on All Cylinders

Based on how inexpensive United’s valuation is, you would think that the company is struggling, but United is actually firing on all cylinders. It just reported its highest-ever quarterly earnings. No matter what way you look at it, this was an impressive earnings report — the company’s non-GAAP earnings per share of $5.03 beat the consensus by $1.00. Moreover, its net income skyrocketed from just $329 million for the quarter last year to over $1 billion this year. 

Revenue came in at a record $14.18 billion, beating analyst expectations of $13.93 billion. Total revenues were up 17% year-over-year.

United does carry a lot of debt, which is one of the issues it is dealing with, but the company did take advantage of the great quarter to prepay $1 billion of high-coupon debt, so it deserves credit for that. 

Also of note, United recently struck an “industry-leading” labor deal with its pilots, which removes something that could have been a distraction and overhang for the stock if talks lingered and/or pilots went on strike. 

United also deserves credit for proactively and aggressively expanding the international routes it offers in order to capitalize on increased demand for international travel. Earlier this spring, the company expanded its international capacity by 25% to take advantage of this.

United is now ramping up even more, adding new routes to Asia, including Tokyo, Hong Kong, Taipei, and Manila, which could help to further propel growth from here. On the earnings call, United CEO Scott Kirby alluded to the fact that “long-term, positive structural changes to the international markets are also apparent in our results.”

Is UAL Stock a Buy, According to Analysts?

Turning to Wall Street, UAL stock has a Moderate Buy consensus rating based on six Buys, four Holds, and one Sell rating. The average UAL stock price target is $63.97, implying 14.14% upside potential.

A ‘Perfect 10’

TipRanks’ Smart Score system likes United Air Lines even more than Wall Street analysts do, giving it a coveted ‘Perfect 10’ rating. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. The score is data-driven and does not involve any human intervention. A Smart Score of 8 or higher is equivalent to an Outperform rating.

Ready for Takeoff

If you put some of the negative headlines and perceptions aside, it’s hard not to like United Airlines stock. The company is increasing its earnings and revenue, and demand looks like it will remain strong, going forward. This type of performance and outlook, combined with United’s incredibly cheap valuation, combine to make the stock look like a compelling buying opportunity.



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