Expect United Airlines’ Profits and Stock to Recover

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Two weeks ago I changed my mind on United Airlines (NASDAQ:UAL) and I wrote that it was worth buying. Since then United Airlines stock rose from 33% from $29.91 on June 2 to $39 today, an increase of 30%.

ual stock

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I am glad I changed my mind in case any investors followed my advice.

However, I did not give any potential price target at the time and I want to do that now. I think UAL still has the ability to move higher. But how much higher? And at what should investors look to trim their holdings?

One way to do this is to make some assumptions and look at the past. We can assume that over the next several years, the traveling public will continue to return to air travel.

Estimating Earnings for United Airlines Stock

Demand will likely accelerate as it becomes more apparent that a vaccine or even several vaccines for the novel coronavirus are going to be available. All indications are that this is likely to occur by the early part of 2021, if not before.

Therefore, demand will pick. Earnings will become positive for most airlines. Right now, analysts are predicting United’s revenue in 2021 will reach between $23 and $38 billion, according to Seeking Alpha. Those ranges are below the $40.8 billion UAL made in 2019.

More importantly, net income estimates are only about $209 million, or 72 cents per share for 2021. That is well below the $11.97 per share it made in 2019, or $3 billion in net income.

Assuming a vaccine significantly alleviates concerns about traveling, I suspect that revenues and profits will begin to approach prior levels. Even at 70% of 2019 profits, the company would make $2.1 billion, or $7.23 per share.

Estimating a Target Price for UAL Stock

That implies that UAL stock today is trading at just 5.5 times adjusted earnings at 70% of its 2019 rate. That is too low. Even if we are off by a wide margin, say 50%, since it is not clear how long this will take, United Airlines would make $3.62 per share.

At 15 times that low estimate, which might take until the end of 2022, UAL stock should trade for $54.23 per share. But here is the thing. By the end of 2021, it will be clear if United can make those earnings.

We really only have to discount that price for the time value of money by about a year or year and a half. At a 10% discount rate for one and a half years, the target price is adjusted to $47.03 (i.e. 1 / ((1.1)^1.5)), which works out to $54.23 times 86.73%, or $47.03).

Compared to today’s price of $39.66, that represents upside for investors of at least 18.6%. But remember, I am significantly reducing the normalization estimate for United’s earnings.

How to Estimate the Upside

For example, using the $7.23 EPS estimate for 2022, which you recall is also a 70% discount from 2019 earnings, the target price at 15 times earnings would be $108.45 per share. And discounting that by 10% for the time value of money works out to $94.06 per share (i.e. $108.45 times 86.73%). That represents a potential gain of 137%.

You can see there is a wide range of potential upside target prices. The range is between $47.03 per share and $94.06. And that assumes we work off a base estimate for EPS that is still 70% of the 2019 level.

The average estimate between these two target prices is $70.55 per share. That seems like a reasonable compromise estimate. It is also a gain of 78% over today’s price.

What to do With United Airlines Stock

We made a lot of assumptions estimating this target price. Any of them could change. For example, the 15 times multiple might be too high. Our margin estimates could be too high, or maybe too low.

The point is that UAL stock is going to be volatile from here on out. That is certain. But the stock will slowly reach a limit as the company’s earnings start to firm up.

One thing is also for sure. Investors will push the stock higher with the slightest inclining that its fortunes are turning around. However, I do believe that UAL stock is still undervalued at today’s price, despite its recent gains.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here.

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