United Airlines Stock Up 7% in January – Time to Buy UAL Stock?

The price of UAL stock has been recovering so far this month as it has advanced 7% compared to December’s closing price ahead of the release of the firm’s financial results covering the fourth quarter of 2021.

The milder-than-expected severity of the omicron variant of the COVID-19 virus and the approval of antiviral treatments from both Pfizer (PFE) and Merck (MRK) have contributed to lifting the valuation of virus-sensitive stocks as market participants remain confident that the pandemic could be finally coming to an end.

For the three months ended on 30 December, the airline is expected to report revenues ranging between $7.6 billion and $8.3 billion resulting in a 133.4% jump compared to the same period a year ago using the mid-point of those estimates.

However, such a figure would still be 27% lower than the one reported for Q4 2019 – before the pandemic started.

This figure is in line with the company’s expectations, as outlined in its latest quarterly report. Back then, the management said that capacity should remain 23% below 2019 levels.

Meanwhile, the market is expecting to see the firm’s adjusted earnings per share landing in a range between minus $1.48 and minus $2.69 per share.

What could be expected from this airline stock ahead of the release of this report? In this article, I will be assessing the price action and fundamentals of UAL stock to outline plausible scenarios for the future.

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United Airlines Stock – Technical Analysis

The chart above shows that the price of United Airlines stock has been posting a series of lower highs but has remained above the $40 level in the past 12 months at least. This has resulted in the formation of a descending triangle setup that typically signals an upcoming support break.

Last Friday, the price rejected a climb above the 200-day simple moving average and this favors a bearish short-term outlook for the stock. That said, since earnings reports typically prompt volatile reactions in the stock price, this thesis could be rapidly invalidated.

As of today, the price of options expiring this Friday indicates that market participants are expecting a 6% move in the stock following the release of the company’s earnings. The event is scheduled to take place on 20 January.

Even if a 6% uptick takes place, the price would not yet break above the descending triangle formation. However, indications that United might be recovering more rapidly than expected to pre-pandemic levels could progressively push the stock price in the weeks that follow the release of these quarterly results.

United Airlines Stock – Fundamental Analysis

Based on the market’s forecasts for the company, United Airlines is expected to return to profitability by the end of the second quarter of 2022.

However, the company’s long-term debt is now quite higher than it was back then. By the end of Q3 2021, it stood at $31.5 billion compared to the $13.2 billion the company owed in 2019.

That said, the firm has $19.3 billion in cash reserves that can be used to pay down a portion of those commitments to reduce its interest expenses and increase profitability in the future.

In the past twelve months, the company’s cash burn was approximately $1.5 billion. However, UAL should start to be cash flow positive from Q2 2022 and forward meaning that cash reserves will not suffer too much.

Using that money, UAL could pay down at least $10 to $15 billion of its debt and that would trim its interest expenses from $1.47 billion to around $800 million.

In this scenario, the company should eventually produce around $2 and $2.5 billion in earnings – possibly in 2023 and forward. At its current market cap of $15 billion, that would result in a forward P/E ratio of 6x.

This is a highly conservative multiple for a firm that has everything it needs to emerge from the health crisis nearly unscathed and investors with the stomach to tolerate some short-term volatility may reap some attractive gains in the next two to three years once the virus situation becomes an item in the rearview mirror.

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