Should You Pick United Airlines Stock After 10% Rise Following Q4 Beat?Should You Pick United Airlines Stock After 10% Rise Following Q4 Beat?

United Airlines stock (NASDAQNDAQ +1%: UAL) recently reported its Q4 results, with revenues and earnings above the street estimates. The company reported revenue of $13.6 billion, reflecting a 9.9% y-o-y growth and above the $13.5 billion street estimate. Its adjusted earnings of $2.00 per share were down 19% y-o-y but above the consensus estimate of $1.69 per share. In this note, we discuss United Airlines’ stock performance, key takeaways from its recent results, and valuation.

UAL stock has faced a slight decline 

UAL stock has faced a slight decline of 4% from levels of $45 in early January 2021 to around $43 now, vs. an increase of about 30% for the S&P 500 over this roughly three-year period. Overall, the performance of UAL stock with respect to the index has been lackluster. Returns for the stock were 1% in 2021, -14% in 2022, and 9% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that UAL underperformed the S&P in 2021 and 2023.

Consistently beating the S&P 500 - in good times and bad - has been difficult over recent years for individual stocks, heavyweights in the industrial sector, including CAT, UNP, and GE, and even mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Can the stock grow?

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UAL face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months - or will it see a strong jump? From a valuation perspective, UAL stock looks attractive and will likely see higher levels over time. We estimate United Airlines’ Valuation to be $60 per share, reflecting a nearly 40% upside from its current levels of $43. Our forecast is based on a 6x P/E multiple for UAL and expected earnings of $10.48 on a per-share and adjusted basis for the full year 2024. The company has guided its adjusted earnings per share to be in the range of $9.00 and $11.00, higher than the $9.48 consensus estimate at the mid-point of the range. This has boded well for its stock, up around 12% since it reported the results.

United Airlines’ revenue of $13.6 billion in Q4 was up 9.9% y-o-y. The company reported a 15% rise in available seat miles, while the load factor was down 290 bps, and passenger revenue per available seat mile also declined 3.3%. The company saw its adjusted pre-tax margin fall to 6.2% from 9.0% in the prior-year quarter. Higher revenues offset by margin contraction led to a 19% y-o-y fall in the bottom line to $2.00 on a per-share and adjusted basis in Q4’23.