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United Continental (UAL) Up 3.6% Since Earnings Report: Can It Continue?

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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 added about 3.6% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is UAL due for a pullback? 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.

Second- Quarter Earnings

The company’s earnings (excluding 75 cents from non-recurring items) of $3.23 per share surpassed the Zacks Consensus Estimate of $3.07. The bottom line also increased 17% year over year owing to higher revenues.

Operating revenues came in at $10,777 million, which outpaced the Zacks Consensus Estimate of $10,702 million. Moreover, the top-line figure was up 7.7% year over year.

Passenger revenues, which increased 8% highlighting the strong demand for air travel, accounted for bulk (91.7%) of the top line. Cargo revenues rose 15% and accounted for 2.9% of the top line. The balance came from other operating revenues.

Operating Results

The company reported a 3% year-over-year rise in consolidated passenger revenue per available seat mile (PRASM: a key measure of unit revenues) to 13.97 cents. Total revenue per available seat mile (cents) increased 2.8% to 15.24 cents. On a consolidated basis, average yield per revenue passenger mile inched up 1.5% from the year-ago quarter.

During the reported quarter, consolidated airline traffic — measured in revenue passenger miles — improved 6.4% year over year. Capacity (or available seat miles) rose 4.8%. Consolidated load factor (percentage of seat occupancy) was up 130 basis points to 84.8% as traffic growth outweighed capacity expansion.  Average fuel price per gallon (on a consolidated basis) escalated 38.7% year over year to $2.26.

Total operating expenses rose 12.2% year over year to $9,616 million in the second quarter. Consolidated unit cost or cost per available seat mile (CASM) — excluding fuel, third-party business expenses, profit sharing and special charges — declined 0.4% year over year.

Liquidity & Buybacks

United Continental generated $1,659 million as free cash flow (adjusted) at the end of the second quarter compared with $314 million in the prior-year quarter. Additionally, the carrier repurchased shares worth $407 million.

Fleet Update

In a bid to improve the flying experience of its passengers, United Continental is continuously taking initiatives to modernize its fleet. Apart from adding new and more efficient planes, the company is retiring old ones. To this end, the carrier recently announced plans to buy 25 new Embraer E-175 and four new Boeing 787-9 planes. The new planes are equipped with all-modern facilities, have additional seating capacity besides being fuel-efficient.

While the Embraer E-175 jets are expected to be delivered next year, delivery of the Boeing 787-9 planes is anticipated in 2020. Notably, United Continental aims to replace 25 CRJ-700 planes with the new Embraer E-175 jets.

Q3 Outlook

The company anticipates capacity to expand between 4.5% and 5.5% while pre-tax margin (adjusted) is estimated to lie between 8% and 10%. Passenger unit revenues are anticipated to increase 4-6% year over year. Additionally, United Continental predicts consolidated cost per available seat mile (CASM) — excluding third-party business expenses, fuel & profit sharing — to either remain flat or decline up to 1% year over year.

Meanwhile, consolidated average aircraft fuel price per gallon is anticipated between $2.27 and $2.32. Effective income tax rate for the quarter is likely to be in the 20-21% band.

Full-Year Outlook Tweaked

For 2018, capacity is estimated to expand in the 4.5-5% range compared with 4.5-5.5% projected earlier. The trimming of the full-year capacity growth forecast is a positive. CASM is anticipated in the range of down 1% to flat year over year. Effective income tax rate is anticipated to be 20-21% in the year. Adjusted capital expenditures are projected between $3.6 billion and $3.8 billion.

United Continental expects adjusted earnings per share to lie in the band of $7.25-$8.75 for the full year. Earlier, the metric was predicted between $7 and $8.50.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to one lower. 

United Continental Holdings, Inc. Price and Consensus

 

VGM Scores

At this time, UAL has a strong Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was also 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.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, UAL has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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