United Airlines (NYSE:UAL) stock took a big hit to the chin this week after the airline announced its order of 100 Boeing (NYSE:BA) Dreamliners. The hefty order (the largest Dreamliner order ever) of wide-body jets is expected to cost United around $30 billion – not a cheap price to pay in the face of a recession.
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With rising interest rates thrown into the equation, it’s not a mystery why investors are giving two thumbs down to the deal. Despite the questionable timing for such a big order, United continues to see a steady improvement in air travel demand and improving fundamentals. Still, a 2023 recession could turn things on a dime.
For now, the order seems to be a massive vote of confidence that a potential recession won’t cause the air travel industry to suffer too hard a landing.
Still, United’s post-order sell-off could prove unwarranted if next year’s economic contraction proves less painful. In any case, it’s been a rocky few years for UAL stock. Since the pandemic tanked the share price, it’s been a turbulent ride for the airline that’s done its best to hold up the fort. At writing, shares of UAL are down more than 60% from their all-time high.
Recent quarters suggest strong air travel demand could continue in a “mild” recession year. Even if management is upbeat about a potential recovery, I can’t help but think the recent Dreamliner order was ill-timed.
I wouldn’t go as far as to say United has its head in the clouds. However, I think a commitment to spending such a massive sum amid growing investor anxiety is a head-scratcher. I am neutral on UAL stock.
United Airlines’ Boeing Order Will Weigh Heavily on Cash Flows
You don’t typically see hard-hit companies opening up their wallets to buy big-ticket items ahead of a recession. Such big orders tend to happen in the face of an economic expansion, not a contraction. United’s order seems to suggest the coming recession won’t be as horrid as many expect. At this juncture, it’s hard to imagine other firms with the confidence to step up to the plate with a multi-billion order.
CEO Garry Laderman stated United has the “luxury” of using its cash flow to finance the deal. Indeed, near-term free cash flow may have been better put in other areas ahead of what could be a doozy for international air travel.
Investors think United is a tad too optimistic for its own good. Such a bulk order of wide-body jets (typically used for international flights) could have waited. Still, by getting in early, United will be able to upgrade its fleet quicker, perhaps saving it considerable sums over the long haul. Further, United may be able to get in such upgrades before any price hikes as inflation lingers.
As we learn how deep the recession cuts, such a big order seems to introduce more risk than potential rewards through the eyes of investors.
Is United Airlines Stock a Buy, According to Analysts?
Turning to Wall Street, UAL stock comes in as a Moderate Buy. Out of nine analyst ratings, there are seven Buys, one Hold, and one Sell recommendation.
The average United Airlines stock price target is $57.89, implying upside potential of 51.1%. Analyst price targets range from a low of $40.00 per share to a high of $81.00 per share.
Indeed, analysts are incredibly upbeat about the airline stock, even with recession risks considered.
The Bottom Line on UAL Stock
United Airlines stock is under considerable pressure following one of the boldest moves we’ve seen from an airline in a while.
On the one hand, United’s big deal could be a sign that the coming economic downturn is likelier to be a soft landing than a hard one. On the other hand, United may be a firm swinging its bat a tad too early.
With recent quarterly strength in air travel and ongoing operating margin improvements, there’s a good chance United could prove last week’s sellers wrong.
Just a week ago, Morgan Stanley named UAL stock its top airline pick for 2023, noting that it sees a “Goldilocks” environment for the year. If it is a Goldilocks year, United’s $30 billion order may feel “just right” for a company marching into the bear’s house.
