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Why Hold Strategy is Apt for United Continental Stock Now?

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Shares of United Continental Holdings, Inc. (UAL - Free Report) have gained 4.2% since the company reported better-than-expected first-quarter 2018 results on Apr 17. Also, management’s trimmed capacity growth outlook for 2018 has dismissed fears pertaining to capacity overexpansion.

We expect United Continental's top line in the second quarter to be driven by robust growth in passenger revenues owing to solid demand for air travel. Additionally, its projection on unit revenues for the same period is encouraging. The company anticipates pre-tax margin between 9% and 11%. Passenger unit revenues are expected to increase 1-3% year over year. Detailed results are expected to be out later in the month.

A glance at the company’s share price performance shows that it has outperformed the industry on a year-to-date basis. The stock has gained 4.1% against the industry’s 19.7% decline.

YTD Price Performance

 

 

We are also impressed by the carrier’s efforts to modernize its fleet. Evidently, United Continentalis constantly adding more efficient planes to its fleet and removing outdated ones.

Additionally, the stock has a  VGM Score of A, which highlights its attractiveness. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Such a score allows investors to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

Despite these key driving factors, we advise investors to wait for a better entry point before buying shares of this airline heavyweight. Here's Why:

Headwinds

We remain concerned about the various setbacks pertaining to customer service at United Continental over the past year. Earlier in 2018, a dog died in one of its flights resulting in severe criticism from all possible quarters. In fact, United Continental earned the dubious distinction of recording the maximum number of animal deaths on its flights in 2017.

Furthermore, high labor costs are likely to hurt United Continental's bottom line in the second quarter as was the case in the first quarter of 2018. This apart, increased fuel costs are anticipated to dent this Zacks Rank #3 (Hold) carrier’s bottom-line growth in the second quarter. Consolidated average aircraft fuel price per gallon is anticipated between $2.18 and $2.23 in the same period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Apart from United Continental, the rise in oil prices is likely to weigh on the second-quarter earnings of other airline operators like Southwest Airlines Co. (LUV - Free Report) , Delta Air Lines, Inc. (DAL - Free Report) and American Airlines Group Inc. (AAL - Free Report) .

The frequent management changes at United Continental also highlight the lack of stability in its management team. Such changes at short intervals generally do not go down well with investors, shaking their confidence in the stock. United Continental’s high debt levels raise concerns as well.

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