Stock of the week: United Airlines jets off to warmer earnings climate
The US economic data last week showed us the impact of the Covid super-charged era of growth: 7% annual inflation in the US, the highest level in nearly 40-years. By the end of the week, some “disappointing” retail sales, US retail sales declined by 1.9% in December, the largest decline in ten months, caused a veil of gloom to descend on some markets. But is this really a sign of stagflation or a premonition of a coming economic slowdown? We don’t think so. We think that a spate of weaker economic growth in the US and across the Atlantic in the UK and Europe, is actually a transition period to a “normal” rate of growth that should help lower inflation in the coming months and years. This normal rate of growth actually suggests a benign future for the US economy, and one where value stocks, including airlines, can finally return to normal.
Airlines in focus for 2022
Below we take a look at United Airlines, which is our stock of the week. As a backdrop, analysts expect a decent Q4 earnings season, even if JP Morgan’s earnings were deemed disappointing and caused the stock to drop 6% on Friday. According to the data gatherer, Refinitiv, S&P 500 companies are expected to grow profit by more than 22% in Q4. Thus, there is still likely to be plenty of good news earnings reports from S&P 500 companies to come.
Why United’s 2022 outlook could lift its share price
For those of you who follow our stock of the week pieces, you will know that we like the airlines, and they are one of our top sector picks for this year as a whole. United is scheduled to release earnings on 19th January after the US market closes. The company has incurred incredible losses during the pandemic period, however, air travel demand, while still below pre-pandemic levels, has significantly improved since 2020, which should be reflected in United’s full year results for 2021. Added to this, the Q4 figure is likely to have been boosted by a strong Thanksgiving period, when people in the US flew cross-country just before the worst of Omicron crisis spread across the world. There are some tailwinds that United and its competitors faced at the end of Q4, including a spate of flight cancellations over Christmas and the New Year period along with inclement weather conditions, and the rising price of jet fuel, the average gallon of jet fuel rose more than 11% in Q4 relative to Q3. However, we think that the investing community could focus on an upbeat outlook for Q1 2022 and beyond, with United airlines expected to see an uptick in long-haul flights, as US consumers choose to holiday internationally, rather than domestically this year. Increased levels of vaccinations around the world and a slow unwinding of Covid travel restrictions and costly testing protocols could also boost the outlook for airlines as leisure travel finally returns to pre-pandemic levels. The financial ambition of the company could also please earnings purists. For example, we expect United’s executive team to announce that they will focus paying down the debt that they accumulated during the pandemic to stay afloat over the coming quarters. We think that the extra liquidity and cash flow coming from a rush of leisure travel bookings will help United’s balance sheet to look perkier in 2022 than it has in more than two years.
Technical indicators suggest lift-off
From a technical perspective, United’s share price fell on Friday, however, key technical indicators suggest that this stock remains in the ‘buy’ zone. It is also a favourite amongst investment banks and has an outperform rating from Cowan. The justification for this rating is that leisure travel will grow and make up for a slow recovery in business travel. However, if business travel picks up this year as Covid shifts from pandemic status to endemic, then this would be an unexpected but welcome boon for United’s future earnings growth.
Volatility could be in store after Wednesday’s earnings release
Its share price has risen nearly 20% since the start of December, and the recent weakness is a good buying opportunity, especially if earnings data on Wednesday gets a positive reaction. Also, as you can see in the chart below, which shows the daily United Airlines share price along with the Average True Range indictor, this stock could be ripe for some short-term volatility. The ATR is a volatility indicator that shows how much an asset moves during a given time frame (in this case it’s a daily indicator). As you can see, the daily price moves have been lower than what we witnessed in December. This suggests that volatility has been lower recently as the stock has generally been trending higher and has been calmer than other parts of the US stock market, for example tech stocks. It also suggests that Friday’s 3% decline in United’s share price was temporary, and not the start of a longer-term trend. Thus, a catalyst like a strong earnings report later this week, could see volatility and daily price moves return to December levels.
While the ATR should not be used in isolation, it does suggest that this stock price is ripe for a volatile move and the earnings report could be the key driver.