We are downgrading our recommendation on United Continental (UAL) to Underperform based on concerns over travel demand and pricing, which is expected to result in weak traffic in the third quarter. The company generated a lackluster performance in the second quarter, missing the Zacks Consensus Estimate and year-ago earnings.
Despite the company's aggressive actions to improve profitability, we believe surging fuel prices and the threat of recession in Europe pose downside risks to the stock. Additionally, high non-fuel costs related to fleet optimization and product initiatives, high unionization, new regulations related to advertising, competitive threats and risks pertaining to the successful Continental integration could hurt the company's profitability going forward.
Thus, we have an Underperform rating with the target price of $18, based on 8x our earnings estimate for 2012. The stock is trading at a discount to the peer group as well as the S&P 500 benchmark, based on the forward earnings estimate.