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Why Is United (UAL) Down 7.7% Since Last Earnings Report?

Zacks Equity Research
Is (IIPR) Outperforming Other Finance Stocks This Year?

A month has gone by since the last earnings report for United Continental (UAL). Shares have lost about 7.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is United due for a breakout? 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.

Earnings Beat at United Continental in Q1

United Continental’s earnings (excluding 6 cents from non-recurring items) of $1.15 per share surpassed the Zacks Consensus Estimate of 94 cents. Moreover, the bottom line showed a massive year-over-year improvement mainly on lower fuel costs.

Operating revenues came in at $9,589 million, which fell short of the Zacks Consensus Estimate of $9,600 million. The top line, however, increased 6.2% year over year driven by higher passenger revenues.

Passenger revenues, accounting for bulk (91%) of the top line, increased 7.1%, highlighting strong demand for air travel. Cargo revenues, accounting for 3% of the top line, decreased 2.4%. Revenues from other sources accounted for the balance.

Operating Results

Consolidated passenger revenue per available seat mile (PRASM: a key measure of unit revenues) increased 1.1% year over year to 13.29 cents. Total revenue per available seat mile inched up 0.3% year over year to 14.61 cents. On a consolidated basis, average yield per revenue passenger mile inched up 0.5% from the year-ago quarter.

During the quarter under review, consolidated airline traffic — measured in revenue passenger miles — improved 6.5% year over year. Capacity (or available seat miles) expanded 5.9%. Consolidated load factor (percentage of seat occupancy) increased 50 basis points to 80.9% as traffic growth outweighed capacity expansion. Meanwhile, average fuel price per gallon (on a consolidated basis) declined 2.8% year over year to $2.05.

Total operating expenses increased 3.7% year over year to $9,094 million in the reported quarter. Consolidated unit cost or cost per available seat mile (CASM) — excluding fuel, third-party business expenses, profit sharing and special charges — dipped 1.8% year over year. Total unit costs also decreased 2.1% in the quarter.

United Continental exited the first quarter with cash and cash equivalent of $1,848 million compared with $1,694 million at 2018 end.  Long-term debt at the end of the reported quarter was $12,734 million compared with $12,215 million at 2018 end.  Furthermore, the carrier bought back $527 million of its common shares in the January-March period at an average price of $83.68 per share.

Q2 Outlook

For second-quarter 2019, United Continental anticipates capacity to expand between 3.5% and 4.5%, while pre-tax margin (adjusted) is estimated in the 11-13% range. Passenger unit revenues are projected to increase 0.5-2.5% year over year.

Meanwhile, consolidated average aircraft fuel price per gallon is envisioned between $2.13 and $2.23. Effective income tax rate for the April-June period is likely to be in the 21-23% band.

Full-Year View

United Continental still expects 2019 earnings between $10 and $12 per share. Additionally, effective income tax is anticipated in the 21-23% band for the current year. Adjusted capital expenditures are still forecasted to be approximately $4.7 billion in the year.  Capacity is now estimated to expand 4-5% year over year compared with the 4-6% range predicted earlier.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, United has a great Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

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



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