Should You Pick United Airlines Stock After A Mixed Q2?

NASDAQ: UAL) recently reported its Q2 results, with revenues slightly below and earnings above our estimates. The company reported revenue of $14.99 billion and adjusted earnings of $4.14 per share, compared to our estimates of $15.15 billion and $3.99, respectively. In this note, we discuss United Airlines’ stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at its stock performance. UAL stock has witnessed gains of about 5% from levels of $45 in early January 2021 to $48 now, vs. an increase of about 45% for the S&P 500 over this roughly three-year period. However, the increase in UAL stock has been far from consistent. 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; for heavyweights in the industrial sector, including CAT and UNP, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) 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.

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 undervalued and will likely see higher levels over time. We estimate United Airlines’ Valuation to be $64 per share, reflecting over 30% upside from its current levels of $48.

United Airlines’ revenue of $15 billion in Q2 was up 5.7% y-o-y. The company reported an 8.3% rise in available seat miles, while the passenger revenue per available seat mile was down 2.9%. The company saw its adjusted pre-tax margin fall to 12.1% in Q2’24 from 15.3% in the prior-year quarter. The company’s bottom line stood at $4.14 on an adjusted basis, versus $5.03 in Q2’23.

The company reported a 3.8% y-o-y rise in average fuel cost per gallon. Looking forward, United Airlines expects its Q3 adjusted EPS to be in the range of $2.75 and $3.25, while it maintains a $9 to $11 range for the full year 2024. The Q3 estimates are lower than the average consensus estimate of $3.44. Overall, United Airlines reported a mixed Q2 and bleak Q3 guidance. Still, with an earnings beat and reaffirming its full-year guidance has boded well for its stock, up 8% in a week. Despite its recent rise, UAL stock looks undervalued. At its current levels of around $48, it trades at 0.3x revenues, versus 0.5x average over the last five years. Our United Airlines (UAL) Valuation Ratios dashboard has more details.