Overall, market conditions are little changed. I’d be thrilled if we got trade deals (but I&rs...
United Continental Holdings
01/21/2014 6:00 am EST
The airline industry was one we largely ignored in years past, given its long history of boom-and-bust cycles; but there has been a profound change in the way most airlines now operate, and the industry has figured out how to make money on a consistent basis, suggests Geoffrey Seiler, editor of Bullmarket.com.
Our top pick for 2014 is United Continental Holdings (UAL). Consolidation has been the biggest driver of the industry's newfound embrace of rational business practices. United and Continental merged in 2010, and the new United is a case study of how the industry has refocused its business.
United is upgrading its fleet to newer, more fuel-efficient aircraft; it is intent on using its mileage and amenity programs to drive loyalty and raise revenue; it has poured money into enhanced IT systems, which are helping it to better manage available seats, to maximize revenue, and lower costs; and, the company is much more disciplined in the management of its capital.
Cost reduction will be one of the drivers for United's performance going forward, but the company is also making sensible investments in its product.
The company benefits from being one of the largest carriers in the New York City market, and that has helped it to secure a number of corporate travel partnerships that help funnel business travelers onto its planes.
The risks for United include the potential for one of its competitors to veer from the current focus on disciplined pricing, and start cutting fares to boost loads.
There is also always the potential for another entrepreneur to try to start up another airline to compete with the majors, though the zeal for such ventures appears to have waned. But with the economy getting stronger, United is well positioned, if the industry remains disciplined.
United's enterprise value is currently 4.8 times its anticipated 2014 EBIDTA. Its P/E is 9.3 times the Street's 2014 EPS consensus of $3.98. Delta (DAL), by comparison, trades at a 5.2 times EV/EBITDA multiple and a nearly ten times forward P/E. While United's stock has gained about 50% this year, it has lagged the, roughly, 120% return for Delta.
Operationally, United underperformed this year, but with the integration of Continental now largely behind it, we think United's post-merger operational performance should take a similar trajectory to that of Delta—the top airline performer in 2013—as its cost cutting program and investments begin to bear fruit.
An improved economy and pick-up in business travel only add to its allure. This, in turn, should put the stock in position to outperform, in an industry that has regained investor interest.
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