United Airlines Stock Is Tumbling. Investors Are Missing the Good News. -- Barrons.com
Dow Jones Newswires March 14, 2023 05:55:00 AM ET
United Airlines stock was the S&P 500's sharpest decliner in premarket trading Tuesday, tumbling 6%, but investors may be overlooking some of the positives from the carrier's latest trading update.
United (ticker: UAL) cut its first-quarter guidance in a filing late Monday, saying it now sees a loss and citing higher jet fuel prices, capacity growth, and lower demand in January and February. But the reasons behind the loss point to a better-than-expected second quarter and leave the door open to full-year earnings estimate upgrades.
Delta Air Lines (DAL) and American Airlines (AAL) are expected to issue updates of their own later at the J.P.Morgan Industrials Conference, which could also have a bearing on how United's guidance is viewed.
United said it expects a loss of 60 cents to $1 a share in the current quarter. In January, United guided for a profit of 50 cents to $1 a share in the quarter. Total revenue per available seat mile will now increase 22% to 23% in the first quarter from 2019 levels, below United's previous guidance for a 25% jump.
But hidden away in the filing was an improvement to the carrier's second-quarter guidance, one that is perhaps being overlooked by the market. Lower demand months are growing less than higher demand months, United said.
That shift in seasonal demand patterns means that while January and February were weaker than expected the coming higher-demand months are set to be stronger.
As a result, United sees operating revenue climbing by a mid-teens percentage from the second quarter of 2022. The analysts' consensus is for a 13.5% rise. Another reason behind the first-quarter loss is United pulling forward costs from a potential pay deal with pilots from the second quarter to the first.
The company also guided for costs per available seat mile, excluding fuel, to be flat for 2023.
J.P.Morgan analyst Jamie Baker said he expects the market to "initially" focus on the first-quarter guidance cut but that other airline trading updates due Tuesday could change that.
"An optimistic embrace of United's disclosure could very well allow some full-year models to improve. But we doubt the market will take this view. More likely, in our opinion, is a disproportionate weighting to the outcome closest at hand; the diminished first quarter guide," Baker said. He has an Overweight rating on the stock with a price target of $ 81.
He added that the updated cost guidance plus improved second-quarter revenue "significantly offsets" the first- quarter disappointment.
The shares closed Monday with a gain of about 30% so far in 2023, outperforming legacy carrier peers American -- up 17% -- and Delta, which has climbed 8.5% since the beginning of the year.
But the stock's retreat in premarket trading is set to erode some of that outperformance, at least for now.
Write to Callum Keown at callum.keown@barrons.com
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