On What I See as a Turn in Oil Prices, I'm Adding Another Airline, United Continental
02/10/2015 5:12 pm EST
Since he thinks it's worth buying airline stocks today on what looks like an end to the rally in oil and the drop in airline stocks, MoneyShow's Jim Jubak is adding shares of this airliner with a target price of $89 a share, as of today, February 10.
I'm a day late in catching what I see as a change of direction in the oil market, but I still think it's worth buying airline stocks today on what looks like an end to the rally in oil and to the drop in airline stocks.
I already own American Airlines Group (AAL) in my Jubak's Picks portfolio and after the pasting that the airline group has taken during the oil rally, I'd certainly think about adding to positions in these shares.
But today, I'm buying shares of United Continental Holdings (UAL). Like all the airlines, United Continental gets a big cut in operating costs from any drop in oil prices. American Airlines Group gets perhaps the biggest leverage from falling oil prices since the airline ended all its fuel hedges back in July. (United Continental traded at $73.53 on January 29. The shares closed at $64.57 on February 9. They were trading at $66.79 at 1:30PM New York time on February 10.)
But United Continental has its own growth story that I think makes it an attractive candidate for a rally on lower oil prices and improved margins. After major hiccups from the merger of United and Continental, the combined company looks to have turned the corner on margins. On January 21, the airline said that first quarter 2015 pre-tax margins would come in at 5% to 7% for the year. That was well above Wall Street expectations. If the company can deliver on that guidance for a couple of quarters-and I think it can-then the stock will re-attract investors who like the United Continental post-merger story but have been put off by glitches in execution.
In January, revenue per passenger mile climbed 1.1% and capacity-available seat miles-rose 1.4%. That's decent discipline for this point in the cycle.
I'm adding these shares to the Jubak's Picks portfolio with a target price of $89 a share by July 2015.