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United Continental (UAL) Down 9.9% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for United Continental Holdings, Inc. (UAL - Free Report) . Shares have lost about 9.9% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

United Continental Q2 Earnings and Revenues Beat

United Continental Holdings' second-quarter 2017 earnings (on an adjusted basis) of $2.75 per share beat the Zacks Consensus Estimate of $2.72.

Moreover, the bottom line improved 5.36% on a year-over-year basis on the back of a 6.43% operating revenue growth. Operating revenues of $10 billion in the second quarter were also marginally ahead of the Zacks Consensus Estimate of $9.964 billion. In addition, the carrier reported an increase in passenger unit revenues in the quarter on a year-over-year basis.

Operating Results

Consolidated passenger revenue per available seat mile (PRASM or unit revenues) improved 2.1% year over year to 12.78 cents. Yield on a consolidated basis grew 2% from the second quarter of 2016, while passenger revenues increased 6.4% to $8,622 million. Cargo revenues increased 22.1% and other revenues improved 3.6% in the same time frame.

During the reported quarter, airline traffic measured in revenue passenger miles, improved 4.3% year over year on a consolidated basis. Capacity (or available seat miles) grew 4.2%. Load factor (percentage of seats filled with passengers) was flat at 83.5%, as capacity expansion was roughly identical to traffic growth. Average fuel price per gallon (on a consolidated basis), excluding hedge losses, increased 15.6% year over year to $1.63.

Total operating expenses, excluding special items, grew 8.3% year over year to $8.6 billion. Consolidated unit cost or cost per available seat mile (CASM) – excluding fuel, third-party business expenses and profit sharing – increased 3.1% year over year, primarily owing to the labor deals inked by the company. The quarter saw the carrier buying back $0.4 billion of its common stock at $74.39 per share (average price) as well.

Liquidity

United Continental exited the second quarter with $6.6 billion in unrestricted liquidity, which included $2 billion of undrawn commitments under its revolving credit facility. In fact, the company generated $1.6 billion in operating cash flow in the quarter under review. Free cash flow at the end of the quarter was $314 million.

Fleet Upgrade Efforts

United Continental is making constant efforts to modernize its fleet. To this end, the company bolstered its fleet by taking delivery of six Boeing 777-300ER aircraft, one used Airbus A319 aircraft and 10 Embraer E175 aircraft in the reported quarter. Next year, it intends to take delivery of four more Boeing 777-300ER planes.

The carrier also said that it has pushed back taking delivery of four Airbus A350 planes from 2018. It intends to expedite its order of 12 Boeing 737 Max planes and two Boeing 787-10 aircraft in 2019.

Third-Quarter Guidance

United Continental expects consolidated PRASM in the band of -1% to +1% (year over year) in the third quarter. Consolidated capacity, which increased 4.2% in the reported quarter, is projected to climb approximately 4% in the third quarter. The company expects pre-tax margin (adjusted) in the range of 12.5%–14.5%. In addition, unit costs (excluding Fuel, Profit Sharing & Third Party business costs) are anticipated to increase in the band of 2% to 3% owing to higher labor costs. Average fuel price per gallon (consolidated) is projected in $1.56 to $1.61 range.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to four lower. While looking back an additional 30 days, we can see even more upward momentum.

United Continental Holdings, Inc. Price and Consensus

 

VGM Scores

At this time, the stock has a nice Growth Score of B, though it is lagging a lot on the momentum front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.


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