United Airlines Stock Has Fallen Too Far on China Fears, Goldman Sachs Says -- Barrons.com
Dow Jones Newswires | June 06, 2019 10:02:00 AM ET
Economic weakness in China could be a problem for United Continental Holdings, but investors are more worried than they need to be, according to Goldman Sachs analyst Catherine O'Brien.
She upgraded shares of United Continental (ticker: UAL) from Neutral to Buy on Thursday, keeping her price target at $108 per share, 30% higher than recent levels, saying losses in the stock create a potential opportunity.
O'Brien says United stock is too cheap now that it has declined more than 16% from its 52-week high, set last December. ( American Airlines (AAL) shares, by contrast, have fallen further than United, but O'Brien already rates American at Buy with a $42 price target, 40% higher than recent levels.)
The back story. Airlines, as a group, are still modestly valued, trading for less than 10 times estimated 2019 earnings on average. Investors aren't convinced the industry consolidation that produced four major U.S. airlines, down from six several year ago, will produce consistently higher profits.
United is one of the most modestly valued U.S. airlines, trading at 7.3 times estimated 2019 earnings, a big discount to stocks in the S&P 500, which trade for 16.9 times estimated 2019 earnings on average.
Southwest Airlines (LUV), by contrast, trades for 11.1 times estimated 2019 earnings and American Airlines trades for just 6 times estimated earnings. Delta Air Lines' (DAL) valuation multiple falls in between those two, at 8.2 times.
What's new. O'Brien thinks investors' concerns about pricing and exposure to the Chinese economy have weighed on United stock, creating an opportunity. China exposure for United, while higher than other U.S. airlines, represents only 4% of United's capacity. O'Brien says the company's exposure to China is down from recent years.
What's more, she believes any pricing concerns are already reflected in the stock price. She also thinks a new credit-card agreement with JPMorgan Chase (JPM) will generate unexpected benefits for United shareholders.
"United management has highlighted that it sees margin upside to reaching a co-brand credit card agreement with economics more on par with its two largest competitors," writes O'Brien in her Thursday research report. The impact from the new credit card deal could be significant, adding more than 10% to estimated earnings per share, according to the analyst.
Looking ahead. Lower oil prices will also help airline earnings in the short run. Benchmark crude-oil prices fell 16% in May. That kind of decline, though, can also signal lower economic growth. A slowdown would make consumers less willing to spend in nonessential areas such as air travel.
Still, United hasn't lost money since the financial crisis. That consistency could be rewarded, someday, with a higher valuation multiple.
United shares were down 2% year to date, as of Wednesday's closing price, worse than the 9.5% gain in the Dow Jones Industrial Average. Airlines overall have struggled in 2019, but a few have managed to stand out. While the airline components of the S&P 500 are up 4% so far in 2019, Delta Air Lines and JetBlue Airways (JBLU) are both beating the Dow year to date.
Write to Al Root at email@example.com
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