Flight to Profit-Land
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has been a tough year for the economy, and with countries experiencing debt problems, even the biggest of the conglomerates weren’t isolated from the market turmoil and uncertainty. All the major global markets were down, mainly because of investors fearing a far worse European crisis. But thanks to the optimism on the street regarding Europe, the Dow Jones index is above 13,000 again, which marks healthy investment conditions, at least for now.
When the global economy is not functioning properly, the first sector to get affected is the aviation sector. And similarly, when the global economy gets kicking back again, aviation stocks are the first to bring in the returns. United continental holdings (NYSE: UAL) is one stock amongst many that faced the brunt of low passenger traffic and high fuel costs, but reported decent numbers. The selloff of shares was just, but looking at the fundamentals and future prospects of the company, the stock is getting ready to get its due attention. As Buffett says, “Be fearful when everyone is greedy, and be greedy when everyone is fearful”, so here are a few reasons to be greedy with United Continental.
1) Fuel costs
Fuel costs account for the majority of the airline’s expenses, and take away most of the profits that the airline companies generate. Oil prices were hovering well above the $100 mark, and that was pulling down the profitability of the aviation industry. Now that the oil price has dropped significantly from those levels, and has stabled around $90 and $100, the industry can breathe a sigh of relief, as most of their profits won’t be taken away by high fuel costs. Since there are many macroeconomic global issues that need to be resolved, the uncertainty in the markets is likely to remain, and oil prices are most likely to remain in this range only.
2) Earnings and Some Facts
United posted good profits of $545 million, which does not include the one time only integration charges of $206 million, compared to the net profit of $538 million in the previous year. The revenues rose by 1.3% to $9.36 billion and the average fare per passenger rose by 2.7% to $279.71. The airline collected $5.2 billion in the form of baggage fees and other extra charges, which was the highest collection of ancillary fees by any airliner.
The company recently hiked the ticket fares, by up to $10 last week, which was matched by its competitors, Delta airlines (NYSE: DAL), American airlines and US airways (NYSE: LCC) This is the seventh price hike by United, in 2012, and the fourth that was matched by its competitors.
United Airlines merged with Continental Airlines, in 2008, forming a parent company United Continental Holdings Inc., with the two companies being its subsidiaries. United Airlines was in talks for a merger with US Airways, but the talks failed twice in 2007 and in 2010. It was in the news recently that US Airways has both American Airlines and Delta Airlines as potential acquirers. If US Airways merges with any of the two airliners, the joint airliner will rival United Continental Holdings, but then again, these are only preliminary talks, and even if talks go through, the resulting airliner would take at least 2 years to be operational.
3) Insider buying
Over August 9 and 10, six executives of the company including the CEO, the CFO and the COO have accumulated 123,100 shares of United Continental. When an insider starts buying a stock, it means only one thing, that the current stock price of the company is undervalued according to him and it’s almost the perfect time to buy. The thing to note here is that the company did not initiate any buyback plan here, the executives went on a buying spree by digging into their own pockets. This shows the amount of confidence and conviction the executives have in the company’s future, and that they believe the company's good times are about to come.
4) Future growth prospects
United has ordered more than 270 new aircrafts, which includes 50 Dreamliner 787’s, which is built by Boeing(NYSE: BA). The new Dreamliner aircrafts are completely state of the art, and are claimed to be the most fuel efficient with low emissions. According to Boeing the aircraft takes up to 20% less fuel than a regular aircraft of nearly the same size. Now since fuel costs account for most of the operating expenses incurred by airlines, the 20% cut could do wonders for the airliner. The company also recently told that it will be investing $550 million to upgrade its existing fleet of aircrafts, and more than $400 million to enhance consumer satisfaction, on the airports. This way the company is not only pumping up its profitability, but also luring passengers towards it.
Conclusion
In short, United is the leading airliner in the US, and is most likely to remain so, until the merger between US Airways and American Airlines happens. The fuel costs have gone down, and the airliner is looking for more cuts in fuel expenses by introducing its fuel efficient “Dreamliners” into the fleet. The company has strategic routes that cover not only prime areas but also the areas where most airlines do not have a reach. Despite a glum period, the company was able to post decent results, and with the spurt of insider buying, a buy rating is sealed to this stock. All the above mentioned points hold quite a good ground altogether, to rate this stock as a solid buy.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
