This article was written by Grant Goldstein, a Financial Analyst at I Know First.

“It is not necessary to do extraordinary things to get extraordinary results”

-Warren Buffet

(Source: Wikimedia)

Highlights

• United’s Q2 Shatters Expectations
• Technical Analysis Shows Mixed Signs
• I Know First Bullish UAL Forecast

United Continental Holdings, Inc. is a holding company whose principal subsidiary is United Airlines, Inc. Incorporated on December 30, 1968, the company has air rights in North America, Asia-Pacific, Europe, Middle East, Africa, and Latin America. The company operates flights from hubs across America.

Outstanding Q2

United Continental Holdings’ second quarter for the fiscal year was excellent. Revenue grew by 7.68% to $10.78 billion. Although fuel costs hiked substantially, the company utilized cost management to make up for it and beat their own expectations. A huge thanks for this increase in revenue comes from the Atlantic region, which saw a gain of 7.9%. Moving forward, the company is certain that revenue will follow the direction of oil prices.

Adjusted EPS rose to $3.23, 17% higher than last years. This shattered expectations of Zacks earnings estimates by 5.81%.

United showed a lot of confidence in it’s future value by increasing stock repurchases by 39.16% to $1.72 billion. The company still has $2 billion in share repurchasing authority.

The company was rather profitable this quarter. The gross profit margin was 28.87%, beating competitors Delta and American Airlines. However, profit margin was lower than both companies, at 6.35%, whilst Delta and Southwest had 8.70% and 9.36%, respectively.

Competitors Stock Price (Source: Yahoo Finance)

This quarter, United had fantastic free cash flow. At $1.687 billion, the company increased FCF by 255.93%. United has an excellent generation of cash, a great sign for investors. For comparison, Delta had FCF of $1.226 billion and American Airlines had $1.02 billion.

FCF (Source: YCharts)

The company’s return on assets, at 4.74%, was lower this quarter than their average of 6.74%. Furthermore, ROE was 23.48%, less than half of the company’s average. These numbers could be due to the increasing fuel prices, as noted by the company, which affecting the whole industry as fuel was up 40%.

United is projecting full year EPS to hit between $7.25 – $8.75 , a .25 cent increase from their past expectation. Also, the company is increasing their capacity in order to have more flights and customers by 5.5%. Passenger revenue per available seat mile (PRASM) is predicted to grow 6%, a 2% hike than previous forecasts. The CEO, Oscar Munoz, stated, “These results are the strongest evidence yet that our strategic growth plan is working, and we are well positioned to carry our momentum into the second half of the year.”

Financials (Source: YCharts)

Following the expectation beating quarter, stock price spiked.

Mixed Technical Analysis

The 50 day short term and 200 day long term moving averages (MA) show bullish signs for UAL. With stock price over both moving averages and the 50 day MA over the 200 day MA, stock price is expected to continue to rise.

Moving Averages (Source: Yahoo Finance)

The relative strength index (RSI) for UAL is above 70. When this is the case, it is a sign that the stock is being overbought and a price trend reversal will soon occur.

RSI (Source: YCharts)

The MACD is bullish for the stock. The MACD is above the signal, a signal line crossover, and it is positive, a zero crossover, which are both bullish signs. Also, the MACD increases as stock price does, showing a sign that the momentum will continue.

MACD (Source: YCharts)

The on-balance volume demonstrates that the upward trend will continue as it increases with stock price.

OBV (Source: YCharts)

The ADX for UAL is at 18. Since it’s below 20, there is no clear sign of a trend.

ADX (Source: Yahoo Finance)

United Valuation

United has a PE ratio of 11.27. When compared to the airline average of 9.829, it’s clear that investors are confident in the future of the stock, as earnings were excellent this quarter.

However, the PS ratio (TTM) of UAL is 0.59, which is lower than the industry’s 0.70. For example, Delta and Southwest Airlines have a ratio of 0.84 and 1.46, respectively. Thus, there is value for the amount of sales the company generates.

The EV to revenues is also lower than competitors: 0.78 to 0.97. Thus, the company is being valued too low for the amount of revenue it has.

With this in mind, there are still some ratios that are higher, showing an overvaluation. For instance, EV to EBITDA is higher than the industry average by 2.164; the company is being valued to high per dollar of EBITDA. Also, investors are paying 2.5 times book value for shares. Since the airline average is 1.87, this is high.

Valuation (Source: YCharts)

UAL News

There are few things worse than traveling on a cramped airplane. However, the days of squished United flights may be over. United has purchased 25 Embraer E-175 jets which have more legroom and ceilings that are five inches higher. The United pilot union restricted the number of seats on outsourced regional airlines, causing the company to remove seats. Although the company will be losing seats, which will lose revenue from fewer customers per plane, more individuals may choose to fly United for the more comfortable travel.

E-175 (Source: Wikimedia)

On June 19th, United announced that Lori Bradley will be senior vice president of talent management and organization effectiveness. Lori is a talent management veteran, with over 25 years of experience in the industry. She is now tasked with a global management strategy, organizational design and effectiveness, and talent acquisition. This is a big win for United and could lead to positive efficiency and customer relations in the coming future.

On July 25th, United, along with American Airlines and Delta, changed their name listing for Taiwan to comply with China’s request. The country set a deadline for July 25th and if the airlines did not change the name of the proclaimed territory, they would be fined. Thus, the airline avoided punishment and strengthened relations with the government. Since revenue from China rose 3.4% last quarter, the move was imperative.

Analyst Recommendations

Yahoo Finance has a growing number of analysts that are recommending not buying the stock. 11 out of 18 analysts say hold after Q2 earnings.

Recommendation (Source: Yahoo Finance)

I Know First Bullish UAL Forecast

On July 23rd, I Know First Algorithm gave an extremely bullish 1 year forecast for UAL. The Algorithm assigned a strong signal of 922.56 and a predictability of 0.57. Evidently, I Know First expects UAL’s price to rise in the future.

Conclusion

I have a bullish one year forecast for UAL. The company seems to currently be under great management, which has really shown in their terrific Q2. With Lori Bradley joining the team, I believe the effectiveness of the company will surely skyrocket. Also, the company seems to be handling rising fuel prices very well. Although some financial ratios are high, such as PE, I believe this is because investors have confidence in Q3 earnings. Unfortunately, the technical analysis of UAL resulted in mix results for the short term future of the stock. This can be seen now as the stock’s performance has been slumping. But, as Warren Buffet said, “Be fearful when others are greedy. Be greedy when others are fearful.”

I Know First is an agreement with my long term outlook for United.

Past I Know First Success With UAL

On June 5th, 2016, I Know First issued a bullish forecast for UAL. In that one year period, UAL grew 85.17%.

Current I Know First subscribers received this bullish UAL forecast on June 5, 2016.

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