Several travel stocks, including United Airlines (NASDAQ:UAL), have underperformed the market in recent years. First, airline stocks were impacted by the pandemic. Once that was tamed, rising travel demand resulted in higher fuel prices. Further, geopolitical tensions, including the ongoing war between Israel and Hamas, are weighing heavily on airline stocks. However, this means that UAL is undervalued now, in my opinion. Additionally, its leadership position and widening presence make me bullish on UAL stock.
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How Did United Airlines Stock Perform in Q3?
In Q3, United Airlines reported revenue of $14.48 billion and adjusted earnings of $1.6 billion or $3.65 per share. Comparatively, analysts tracking the stock expected UAL to report revenue of $14.44 billion and earnings of $3.35 per share in the quarter ended in September.
UAL’s top line surged by 12.5% year-over-year, allowing the company to report record sales in Q3, which was near the high end of its guidance. United Airlines stated that it experienced a strong and steady demand environment in domestic markets, as sales were up 9% compared to the year-ago period. Moreover, domestic sales in Q3 were the second highest ever for UAL and remain a key driver of profits.
Its International segment also reported record profits in the Atlantic and Pacific regions. United Airlines emphasized that revenue in the Atlantic region grew by 15% compared to Q3 2022 and was up a massive 70% compared to the same period in 2019. Furthermore, while capacity for the Pacific region declined by 24% compared to 2019, sales were much higher in Q3 for UAL.
What Drove Revenue for UAL Stock in Q3?
It seems that United Airlines has built a winning strategy, as demand for its premium products remains high. For instance, revenue for the Premium Economy Cabin vertical has outpaced capacity growth since the option was introduced in 2019. Sales from premium products in Q3 were up 20% year-over-year and now account for more than 50% of total passenger sales.
Moreover, UAL’s Basic Economy product remains a popular option for customers, as its sales in Q3 grew by 50%. As well, United Airlines continues to experience the benefits of its airline loyalty program, which results in repeat purchases and steady demand.
In Q3, its Mileage Plus program set a new record as it almost doubled the number of new members in the last five years. According to the airline giant, spending across the Mileage Plus card portfolio has grown by double-digits in the first nine months of 2023. Moreover, the number of miles redeemed was the highest ever for any Q3 in the company’s history.
It’s quite evident that UAL has diversified its revenue streams, capitalized on rising customer spending, and expanded its portfolio of products, allowing it to navigate a challenging macroeconomic environment with relative ease.
UAL Stock is Down 12% in the Past Month
Despite its stellar results in Q3, UAL stock has fallen by 12% in the past month as investors remain worried about the ongoing war between Israel and Hamas. United Airlines has suspended flights to Tel Aviv, Israel, through October, which can potentially drag its earnings down to $1.80 per share in Q4, compared to earnings of $2.46 in the year-ago quarter.
Further, if the flights are suspended until the end of 2023, earnings estimates fall lower to $1.50 per share, according to the company. Analysts expected UAL’s earnings to be much higher at $2.09 per share for the December quarter.
Investors are also wary about the company’s declining cargo sales, which point to sluggish consumer demand. In Q3, UAL’s cargo sales were down 13% at $333 million compared to estimates of $347.6 million.
Another major reason for the underperformance of airline stocks in the last three years is the rising balance sheet debt of these companies. UAL and its peers increased their debt levels considerably to fund their high cash burn rates amid COVID-19. As the airline sector is capital-intensive, UAL ended Q3 with $36.7 billion in debt.
But it also has more than $17 billion in cash and recorded free cash flows of $2.04 billion in the first nine months of 2023. Comparatively, its net interest expenses totaled $724 million in the last three quarters, falling almost 30% year-over-year. So, the important thing is that UAL is generating enough cash to fund its capital expenditures and interest expenses.
UAL Stock is Cheap
According to consensus estimates, United Airlines is forecast to increase its adjusted earnings from $2.52 per share in 2022 to $9.77 per share in 2023 and $9.84 per share in 2024. So, priced at 3.8x 2024 earnings, UAL is among the cheapest stocks in the S&P 500 Index (SPX).
Is UAL Stock a Buy, According to Analysts?
Wall Street remains bullish on UAL stock, giving it a Moderate Buy rating. Out of the 17 analysts covering UAL stock, 11 recommend a Buy, five recommend a Hold, and one recommends a Sell. The average UAL stock price target is $60.88, indicating upside potential of 65.6%.
The Final Takeaway
UAL stock is wrestling with narrowing profit margins and rising costs, and I believe these headwinds will impact the company’s financials in the near term. However, once the situation improves in the Middle East and inflation stabilizes in the next 12 months, UAL is well-positioned to deliver outsized returns to shareholders.
Additionally, United Airlines should grow its earnings at a stellar rate from here, providing it with enough opportunities to reduce balance sheet debt and reinvest accretive cash flows in growth projects.
