You can say that United Airlines (NASDAQ:UAL) has really taken off since the start of the year. Since the first trading day of 2023, UAL stock has cruised to higher prices, with shares up around 30%.
While the stock has started to pull back in recent days, this may only be a temporary deceleration. Although difficult to prove, UAL’s latest slight sell-off may be the result of investors locking in profits on the heels of the legacy carrier’s latest strong earnings report.
Given the high likelihood of a 2023 recession, these investors may be fearful that subsequent fiscal results will come in far less stellar. Yet even as a recession looms, airline industry forecasts call for demand to stay strong.
This suggests United could continue to knock it out of the park with its quarterly results. In turn, fueling a further liftoff for the stock.
UAL Stock, Strong Earnings and Recession Worries
On Jan. 17, United Airlines released results for the fiscal fourth quarter. For the quarter, United reported $12.4 billion in revenue, up 51.4% from the prior year’s quarter. Earnings came in at $2.55 per share, versus the $1.99 per share loss reported in Q4 2021.
More importantly for UAL stock, these results came in well ahead of expectations. Revenue slightly beat consensus, and earnings beat the sell-side’s forecasts by 44 cents per share.
Management also provided earnings estimates for the current quarter (between 50 cents and $1 per share) and the full year 2023 ($10 to $12 per share) that were ahead of the then-current sell-side forecasts (31 cents and $6.84 per share, respectively).
However, despite the strong earnings and updates to guidance, recession worries may be taking hold again. Given the cyclical nature of the airline industry, it generally makes sense to be cautious about airline stocks heading into a recession.
In an industry with high fixed costs, a moderate change in demand can have a dramatic impact on operating results. That said, while the economic environment may get challenging over the next twelve months, its impact on airline demand may not be that severe.
Why United Could Still Fly High in a Recession
In my last article on UAL stock, I discussed United CEO Scott Kirby’s high confidence regarding the company’s prospects going into 2023.
While conceding that the airline is preparing for what he anticipates will be a “mild recession,” Kirby pointed to continued strong booking demand as a sign that an economic downturn may not mean stormy skies ahead for the airline.
Yet now, there’s more than just Kirby’s optimistic statements pointing to continued good times ahead for United Airlines. According to the latest throughput data from the Transportation Security Administration, air passenger traffic is coming in consistently above pre-pandemic levels.
Airline website traffic also continues to climb compared to prior-year levels. What tailwinds for the industry such as post-lockdown “revenge travel” may be fading, other factors, such as rising corporate travel, are helping to further elevate demand.
With all of the uncertainty about the impact of a recession, UAL continues to trade at a discounted valuation. Shares trade for just 7.1 times the sell-side’s 2023 earnings forecast, and for 4-to-5 times management’s current outlook. If Kirby’s assessment proves correct, and current demand trends stay largely unchanged, this stock could be in for a major re-rating.
Bottom Line
Before Covid, UAL traded for around $80 per share. If United can meet/beat expectations and generate $12 per share this year, it will have officially made a full trip back to pre-pandemic levels of profitability. In turn, justifying a move back to its past price level.
Although economic headwinds have yet to affect airline profitability there’s still a risk conditions could become unfavorable for the industry. For instance, if a 2023 recession ends up being more than “mild,” current demand trends could reverse course.
A drop in demand could also reduce the airline industry’s ability to pass along rising costs on to passengers. Both these factors could severely affect profitability.
Nevertheless, until more data comes out indicating air travel demands are changing for the worse, UAL stock remains a promising comeback story.
UAL stock earns a B rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place