•United Airlines Holdings, Inc. stock has slumped despite strong Q2 guidance, with a $10 EPS target for the year.
•The airline’s financial position is strong with $14 billion in cash, $40 billion in PP&E, and net debt of only $13 billion.
•United Airlines could potentially start returning capital to shareholders through share buybacks, signaling confidence in the company’s future, while the stock trades at only 4x EPS targets.
•I am Mark Holder (aka Stone Fox Capital), a CPA with degrees in Accounting and Finance. I lead the investing group Outfox The Street, where I attempt to uncover potential multibaggers while managing portfolio risk via diversification.
Not even a month ago, United Airlines Holdings, Inc. (NASDAQ:UAL) confirmed strong guidance for Q2, yet the stock has slumped to recent lows. The airline confidently guided to a $10 EPS for the year, reminiscent of the guidance from cruise line Royal Caribbean Cruises Ltd. (RCL), but the stocks have traded in opposite directions. My investment thesis remains ultra-Bullish on the airline due to the deep valuation and market disconnect.
Next Leg Up
The airlines had a monster 2023 and the stocks are being held back in 2024 due to repeated negatively on the sector. Now, the airlines apparently aren’t growing earnings enough off record levels.
United Airlines just re-confirmed the goal for Q2 ’24 EPS in the $4 range. The airline produced a $5+ EPS last Q2, but the market should really be focusing on the massive profit and cash flow stream going forward, with some of the elevated levels last year due to some margin boosts.
The airline clearly needs to grow cash flows and boost profits to further reward shareholders, but United Airlines has the money now to vastly alter the view of the company. The guidance is for an EPS of $10 per share in 2024 with ~$6.5 billion in capex this year and an average of $7 to $9 billion in capex from 2025 to 2027.
United Airlines produced $7 billion in operating cash flow last year. Even without growth, the airline will throw off similar amounts of operating cash flow this year used to either acquire aircraft or pay down debt, both moves boosting the balance sheet.
The incredible part of the story is that both United Airlines and Royal Caribbean have $10+ EPS targets for the year, yet the cruise line trades at 3x the price of the airline. Royal Caribbean has soared to $160 and United Airlines is stuck below $50 trading at only 4x forward EPS targets.
Better Debt Position
United Airlines ended Q1 with a cash balance of $14 billion and total PP&E of over $40 billion. A big part of the negative story is some market misunderstanding of how the airline has the balance sheet back to the pre-Covid strength. The debt level might appear high at nearly $27 billion, but the investor should understand the net debt position is only $13 billion.
The amazing part of the story with Royal Caribbean soaring to $160 on an $11 EPS target for 2024 is that the cruise line saw debt soar to over $20 billion during Covid. United Airlines has a far higher debt level, but the market might misunderstand the debt levels due to the cruise lines having more confidence is raising cash on another global shutdown, while the airlines are holding massive cash loads to avoid needing to raise cash.
United Airlines is in a far better debt position. But even more important, the airline has a massive PP&E balance at $40 billion and over $27 billion above the net debt. The airline could definitely signal more confidence to the market by repaying debt and realizing the aircraft and equipment assets will provide substantial opportunities to borrow money if needed in the future.
The airline is in such a strong financial position, the company could easily start returning capital to shareholders. At the recent Bernstein conference, CEO Scott Kirby definitely hinted at the airline starting a share buyback after repaying $1.8 billion in high-cost debt due to the stock trading at 5x earnings. The CEO hinted that a dividend doesn’t become appealing until the stock trades at 15x earnings.
The stock market definitely isn’t ready for United Airlines to actually announce a share buyback and to start repurchasing shares. Delta Air Lines (DAL) has restarted a minimal dividend recently, hiking the quarterly payout to $0.15 for a 1.2% yield, but the cruise lines are clearly not in a position for capital returns due to the higher debt levels. The market, though, is ironically more positive on the cruise lines.
Takeaway
The key investor takeaway is that United Airlines Holdings, Inc. stock is far too cheap here. The stock has a $10+ EPS stream and trades at only $50. A big capital return plan could really shock the market, or the airline will just start retiring a ton of outstanding shares built up during Covid losses.
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