The new travel boom has been in effect for a couple of quarters now, and United Airlines (UAL) is one of the beneficiaries, as its sales and earnings have catapulted out of the weak pandemic period, observes Mike Cintolo, editor of Cabot Top Ten Trader.
In the recently reported Q3, everything went bananas as prices were high and people traveled anyway — not only did revenues leap 66% over the prior year, they were also up 13% from the pre-pandemic 2019 Q3, with revenue per seat mile up a big 25% from 2019 (capacity was actually down 10% versus three year ago).
And earnings went crazy, totaling nearly $3 per share and coming in more than 20% above expectations. That’s certainly a reason for the strength, but we think there’s something more that could be shaping up, too.
Management expects a very strong Q4, stating that operating margins should beat the comparable 2019 quarter (that would be the first time that’s occurred since the pandemic), and sees durable uptrends for air travel due to the Covid recovery, hybrid work and overall supply challenges (which is keeping capacity in check and prices elevated).
Indeed, analysts think earnings could rise to $6 per share next year, and even that could prove conservative given recent trends. However, due to the bear market and fears of recession, it seems like big investors have looked past those likely good times of late (i.e., expecting the recession to quickly cut into business next year), as the stock trades at just 6x to 7x next year’s (possibly conservative) earnings estimates.
Thus, part of the attraction here is something we’ve seen a bunch since the pandemic — investor perception starting to rise as fears of an earnings stumble in the quarters ahead fade. It’s obviously cyclical, but we’re intrigued by travel stocks in general, and United Airlines in particular.