Key Points
United Airlines’ stock continues to fall despite strong financial results.
The ongoing conflict in Israel is impacting the company’s guidance and may cause further damage.
Despite near-term challenges, there is high demand for seats and it is expected to remain strong.
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Shares of United Airlines (NASDAQ: UAL) dropped after the company reported better-than-expected Q3 results, indicating a potential buying opportunity. However, the positive news was overshadowed by weaker-than-anticipated guidance, largely due to external factors. The conflict in Israel has disrupted travel to the region, and if the situation persists, it could significantly impact United Airlines’ Q4 results.
It is important for investors to note that despite the conflict, there is still high demand for seats, which is driving solid business for the company. The current downward pressure on the stock price is a short-term challenge, and if the stock reaches the bottom of its trading range over the past three years, it could present another opportunity for investors.
Strong Quarter for United Airlines Driven by Increased Passenger Count
United Airlines had a strong quarter, reflecting pent-up demand for travel. There is robust demand for travel, particularly for business-related trips. The company reported a record net revenue of $14.48 billion, a 12.4% increase compared to the previous year. This growth exceeded Delta’s performance by 200 basis points and surpassed consensus estimates by 500 basis points.
The increase in revenue was mainly driven by a 15% rise in capacity and passenger numbers, offset by a slight decline in revenue per passenger mile. All regions experienced growth, with international travel leading the way with a 22.6% increase. Premium and rewards traffic also made significant contributions to the company’s results.
United Airlines also achieved record profitability in multiple segments, with systemwide EBIT up 29% compared to the previous year. The company reported a net income of $1.1 billion, a nearly 17% year-over-year increase, and adjusted earnings of $3.65 per share, representing a 30% year-over-year growth. These improved earnings are aiding the company’s debt reduction efforts. However, the war in Israel is already impacting the company’s guidance, and the impact is likely to grow. Once air travel to Israel resumes, demand is expected to remain resilient and drive a surge in business.
United Airlines Hindered by Capital Return Program
United Airlines stock is trading at a significant discount compared to Delta Air Lines (NYSE: DAL) for a reason. Although both airlines relied heavily on debt during the pandemic, United Airlines was already in a weaker financial position and will take longer to recover. Although net debt leverage has decreased to 2.5X, total debt remains high and will affect cash flow for the next few years. As a result, United Airlines is unlikely to initiate dividend payments like Delta, which has already begun doing so. Delta’s dividend, although not substantial, is sustainable and has growth potential. Analysts are optimistic about United Airlines’ recovery and have given the stock a Moderate Buy rating. The consensus price target for the stock has slightly decreased but remains strong at $65, representing a potential 77% gain from the current price. Even the lower end of the price range implies some upside, with Susquehanna setting a target of $44, suggesting a nearly 20% increase from the stock’s post-release price.
The Technical Outlook: United Airlines Approaching Critical Support Level
United Airlines’ stock price is declining and approaching a critical support level. This level has been significant in the past, leading to notable price reversals. If market sentiment improves and focuses on the bigger picture, the stock is likely to rebound from this level. However, if the stock fails to do so, it could continue to decline and retest the lows seen in 2020, presenting an even greater value proposition.
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