Airlines are making it abundantly clear that the recovery will take longer than anticipated.
(ticker: UAL) was the latest carrier to cut forecasts, issuing a bleak update on Friday. The airline now expects revenue in the fourth quarter to be down 70% from a year earlier, slightly worse than previously forecast. The revenue hole will result in operating losses of at least $24 million a day, plus an additional $10 million a day for debt and severance payments. Ticket bookings are decelerating, the airline said, indicating that January revenue will also be down 70%.
United struck an optimistic tone for 2021, saying its confidence is now “even stronger” for a rebound in 2021 and beyond.
But the update confirms what has already been evident: The recovery is taking a breather as the health crisis worsens. The surge in cases after Thanksgiving arose because of travel and gatherings over the holiday. Public-health officials are urging people not to travel over Christmas and New Year’s. Many states and local governments have also imposed lockdown measures and quarantine rules for travelers.
But several analysts argue that investors should look beyond the weakness to a recovery next year as vaccines are distributed and travel begins to return to pre-pandemic levels. That has long been the narrative behind the bullish case on the stocks, and Wall Street isn’t abandoning it now.
United “continues to look well positioned to benefit from a demand recovery” in the second half of 2021, Citigroup analyst Stephen Trent writes in a note on Monday. Leisure travel is showing “continued but uneven improvement, while business travel makes a slower comeback.”
Trent reiterated a Buy rating on United and $52 price target, implying gains of around 7% from recent prices.
Seaport Global’s Daniel McKenzie cut his estimates for United’s fourth-quarter pretax losses by 15% and now forecasts a loss of 35 cents per share in 2021. That compares with a prior forecast for a full-year profit of $2.60 a share.
But McKenzie reiterated a Buy on the stock and raised his price target to $62 from $56. The “recovery story” in 2021 and 2022 is better than most investors appreciate, he writes. “Many are modeling a zombie industry in 2021 and 2022 which is understandable, but incorrect in our view.”
While airline balance sheets have deteriorated because of huge increases in debt that isn’t being matched with revenue, United is still likely to earn $9 to $10 a share in 2022, McKenzie estimates, depending on the pace of the international recovery.
United’s balance sheet is likely to improve over the next couple of years as the company gradually pays down debt and keeps capital expenditures muted. Operating costs have been cut sharply. The company also racked up $8.2 billion in net operating losses through the first nine months of 2020. Those are “carryforward” assets that can be used to offset income taxes when profits eventually materialize.
McKenzie arrives at a $62 target based on a multiple of five times estimated 2022 enterprise value to Ebitdar, or earnings before interest, taxes, depreciation, amortization, and rent. Put another way, if United earns $10 a share in 2022, a multiple of six times earnings would imply a $60 stock, still well below the average multiple of 9 times earnings for airlines historically.
United shares were down 1.4% to $47.69 Monday morning. The
Dow Jones Industrial Average
was up 0.5%.
Write to Daren Fonda at firstname.lastname@example.org