Low Oil Prices Boost United Continental

12/21/2015 8:00 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Oil is back under $40 a barrel again and continues to fall. That situation is weighing on the stock market, but it shouldn’t, argues Mark Skousen, editor of Fast Money Alert.

Lower energy prices benefit just about everybody but the folks that produce it. The rest of us will pay less to drive, less to fly, and less to heat and cool our homes and offices.

Lower energy prices will provide a substantial economic stimulus in 2016, especially to airline stocks. United Continental Holdings (UAL) has rallied sharply in the past week and is now close to our buy price.

The fundamentals of the airline look strong: earnings have risen from $1.30 a share to $2.79 a share in the past year and the company has positive guidance, especially if fuel prices remain low. 

United’s return on equity is significantly above the industry average and the S&P 500 (SPX): 105%.

The future looks bright for United, with its new fleet of Boeing 737 and Boeing 787 Dreamliners. The airline is expanding rapidly and now has more international flights than any other airline leaving from New York and Washington, DC.

The cost savings from lower fuel prices have been tremendous. It now enjoys profit margins exceeding 17% and the aforementioned ROE of an astonishing 105%.

The company now has more than $5.6 billion in cash, so it has plenty of money to expand and still finance its long-term debt of $12 billion.

The stock remains cheap, selling for only seven times expected earnings into 2016. It has great growth potential; it has a price/earnings to growth ratio of only 0.25 (anything less than 1 is considered excellent). I suggest you keep buying.

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