Is United Airlines Stock A Buy Before Upcoming Earnings? (NASDAQ:UAL)

Elevator Pitch

I assign a Buy investment rating to United Airlines (NASDAQ:UAL).

UAL is a Buy prior to the release of upcoming Q2 2022 earnings. Although United Airlines’ Q1 2022 metrics were good and its Q2 2022 guidance was impressive, investors still don’t think that UAL can deliver on its 2023 and 2026 profitability guidance as seen with consensus numbers. I expect positive surprises to lead to a substantial re-rating of the company’s shares, when United Airlines’ actual profit margins for 2023 and 2026 exceed market expectations. This makes UAL a Buy-rated stock in my opinion.

Is United Airlines Making A Profit?

Similar to other companies in the aviation industry, United Airlines was adversely affected by lockdowns and border restrictions put in place to combat the COVID-19 pandemic in the past two years or so. UAL hasn’t been making a profit for full-year FY 2020 and FY 2021, according to historical financial data sourced from S&P Capital IQ.

More specifically, United Airlines suffered from losses in eight of the last nine quarters between Q1 2020 and Q1 2022. In the past two years, the company was only profitable in the third quarter of 2021. That was mainly attributable to the $1.1 billion in grant income recognized in Q3 2021 relating to “Payroll Support Program agreements under the CARES Act” as highlighted in its Q3 2021 results press release.

I discuss about UAL’s profitability and financial performance for 2022 and beyond in the rest of this article.

UAL Stock Key Metrics

Before carrying out a preview of United Airlines’ Q2 2022 earnings, I analyze the key metrics revealed as part of UAL’s Q1 2022 financial results first in the current section.

Earlier, UAL announced the company’s Q1 2022 results on April 2022, and its most recent quarterly financial performance was decent.

United Airlines’ operating revenue jumped by +135% YoY from $3,221 million in the first quarter of 2021 to $7,566 million in the recent quarter. The company’s first quarter top line missed the market’s consensus revenue estimate of $7.68 billion slightly by -1.4%. Separately, UAL’s non-GAAP adjusted net loss per share narrowed substantially from -$7.50 in Q1 2021 to -$4.24 in Q1 2022, which was a marginal miss (-0.6%) as compared to the sell-side’s consensus bottom line projection of -$4.22 per share.

In a nutshell, UAL’s key Q1 2022 financial metrics largely met market expectations.

The company also performed well on other metrics. United Airlines’ non-GAAP adjusted net operating loss halved YoY from -$2,758 million in Q1 2021 to -$1,384 million in the most recent quarter, which was better than the Wall Street analysts’ consensus forecast of -$1.41 billion as per S&P Capital IQ. UAL’s key operating metrics, ASMs (Available Seat Miles) and PRASM (Passenger revenue per available seat mile), grew by +75% YoY and +56% YoY to 53.3 billion and $0.1192, respectively in Q1 2022.

In summary, the strong YoY growth for the key financial and operating metrics, and the very marginal top line and bottom line misses, suggest that UAL is on the path to recovery. This positive view is also validated by United Airlines’ comments at the Q1 2022 results briefing on April 21, 2022, where the company stressed that “we finally reached the inflection point as we transition from pandemic to endemic.”

When Does United Airlines Report Earnings?

United Airlines disclosed in a prior press release issued on July 1, 2022 that the company will be reporting its upcoming Q2 2022 earnings on Wednesday, July 20, 2022 after trading hours.

What To Expect From Earnings

At its late-April 2022 first-quarter investor call, UAL guided for “the best TRASM (Total Revenue Per Available Seat Mile) and highest quarterly revenue in our history” and “a 10% operating margin” for Q2 2022. United Airlines also noted at the call that it expects to generate positive pretax earnings for both Q2 2022 and full-year FY 2022. In addition, the company noted at the quarterly results briefing that business travel revenue had recovered to 80% of pre-pandemic levels at the time of the call in April, and it guided for “business TRASM contribution” to return to “100% of 2019 levels soon.”

There are three key takeaways from United Airlines’ management guidance and commentary as per its first quarter earnings call.

Firstly, UAL is expecting its Q2 2022 TRASM to be +17% higher than what it was in Q2 2019. In comparison, United Airlines’ Q1 2022 TRASM was -3% below pre-COVID levels. This suggests that United Airlines is making good progress in its recovery from the pandemic.

Secondly, United Airlines’ guidance for positive income on a pre-tax basis for the upcoming quarter and full year represents a key inflection point in profitability for the company. As mentioned earlier in this article, UAL was loss-making in eight of the last nine quarters.

Thirdly, there were worries that business travel might never return to normalized levels prior to the pandemic outbreak. But UAL’s encouraging business travel metrics and positive outlook for business travel revenue suggest that such concerns are overdone.

In mid-May 2022, United Airlines revised the company’s Q2 2022 TRASM guidance upwards with expectations that its TRASM in the second quarter this year will be +23%-25% (versus +17% as per earlier guidance) better than what it achieved two years ago. The company also maintained its 10% operating profit margin guidance.

At the most recent investor conference that the company participated in, the Bernstein 38th Annual Strategic Decisions Conference on June 1, 2022, UAL commented that “even if you look at the data on our operating margin in the second quarter, and we’re in the early innings of this recovery.” As per S&P Capital IQ data, United Airlines’ non-GAAP adjusted operating profit margin for Q2 2019 was 13.5%, which is +3.5 percentage points higher than its Q2 2022 operating margin guidance of 10.0%.

In conclusion, I expect United Airlines to deliver strong TRASM growth (as compared to pre-COVID levels in 2019) and positive earnings in Q2 2022. The upwards revision in TRASM guidance in May and encouraging comments from management at the June investor conference give me the confidence that UAL’s upcoming quarterly financial results will exceed market expectations.

What Is UAL’s Stock Forecast?

UAL has guided for the company to generate non-GAAP adjusted pre-tax profit margins of 9% and 14% in FY 2023 and FY 2026, respectively at its June 2021 Investor Day.

The FY 2023 target pre-tax margin of 9% appears to be realistic, as United Airlines’ pre-COVID pre-tax margin was 9.4% for FY 2019 and the company is on the road to recovery as detailed in this article.

UAL’s FY 2026 pre-tax margin goal of 14% is slightly more ambitious. But this is supported by the company’s cost optimization initiatives which target $2 billion in expense savings implying a reduction in CASM (Cost Per Available Seat Mile) by -8% between FY 2019 and FY 2026, and expectations of a full recovery in the global aviation industry by then.

In contrast, sell-side analysts project that United Airlines will achieve much lower pre-tax profit margins of 5.7% in FY 2023 and 9.8% in FY 2026, as per S&P Capital IQ.

Is UAL Stock A Buy, Sell, or Hold?

UAL stock is a Buy. Even though United Airlines issued strong guidance for Q2 2022 and signaled a return to profitability for full-year 2022, the market doesn’t have much confidence in the company meeting its 2023 and 2026 pre-tax margin targets. In other words, there is a mismatch between United Airlines’ management guidance and investors’ expectations. In my opinion, United Airlines is well-positioned to beat market expectations in terms of pre-tax margins for FY 2023 and FY 2026 based on a review of Q1 2022 metrics and Q2 2022 guidance, and this will drive a positive re-rating of its shares.