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Bear of the Day: United Continental Holdings (UAL)

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It has been a summer to forget for the airline industry.

Increased competition is finally catching up to the space, while the recent burst of terrible storms kept several major airline hubs out of commission too. One such airline that was especially impacted was United Continental (UAL - Free Report) , the parent company for United Airlines.

This airline has its second largest hub at Houston’s George Bush Intercontinental Airport , pushing nearly 400 flights a day out of this key gateway. Obviously, Hurricane Harvey took a big hit out of this operation with its massive rainfall, so that is likely to keep a lid on the potential for UAL shares in the near term.

But the weather isn’t the only thing that is an issue for airlines and UAL in particular. Recent events have also have had an impact on fuel prices, and the extremely low costs that airlines have been seeing on this front may finally be starting to break higher.

Gas Prices

The International Air Transport Association has their oil price projection at $54/barrel for Brent Crude, far higher than the $44.6/barrel that was seen in the previous year. Competitors Southwest Airlines and Delta have already bumped up their fuel cost expectations, while United has also done the same.

In fact, United moved its fuel price per gallon projection to $1.72-$1.77 from earlier projections of $1.56 - $1.61. That represents a roughly 10% increase in fuel costs, something that is likely to hit the bottom line for United in the immediate future.

Recent Estimates

Thanks to the storms and the recent uptick in gas price projections, analysts have been moving their estimates on UAL earnings lower. This represents a somewhat stark reversal from just a few weeks before when analysts were actually raising their estimates for UAL shares. However, it is clear if we look to the magnitude of the latest estimate changes, that things have decidedly swung into negative territory for United.

That is because, one month ago, the consensus estimate for United was at $3.00/share. Now, after the deluge of bad news and increased fuel prices, the estimate is at a paltry $1.87/share. That represents a nearly 38% cut in the past month, an obviously terrible trend.

Things don’t get much better when we look to the full year either though, as those estimates have also taken a nose dive. The consensus has slumped by about 18% in the last month for the one-year time period, and then 22% for the following year, suggesting that it isn’t looking like a bright future for the company either.

No wonder the company has seen its shares under pressure as of late, and why the industry has such a poor rank right now. Given this, it shouldn’t be a surprise that United has earned itself a Zacks Rank #5 (Strong Sell), and that we are looking for more sluggish trading from the company in the near term.

Other Choices

Given the weakness in the airline space, it might be a good idea to look past this industry for other options in the transportation world. One that looks a bit more promising these days is the services segment of the transportation world, as it has a top 25% rank right now.

An interesting one that may not be on your radar as of yet is Student Transportation STB. This ‘buy’ ranked company has a great fundamental score and is in a much less volatile area of the market, school bus transportation.

So, if you are tired of the turbulence of the airlines and are looking for a better transportation pick, definitely give Student Transportation a closer look. This is especially true until the airline world—and UAL in particular—can get back on track to strength and fuel costs under control once more.


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