On Thursday, Seaport Global Securities updated its outlook on shares of United Continental (NASDAQ: UAL), raising the price target to $97.00 from $80.00, while maintaining a Buy rating on the stock. This adjustment reflects a positive view on the airline industry's potential for margin expansion, influenced by disciplined growth strategies.
The firm's analysis indicated that the industry is experiencing an evolution reminiscent of the period between 2011 and 2019, a time when slower growth led to wider profit margins. Management at United Continental has expressed confidence in their ability to drive margin expansion over the next three years, drawing parallels to this past period of industry success.
While Seaport Global Securities is not ready to model management's full expectations today, they suggest that a 10% pre-tax margin in their 2026 outlook could add approximately $14 per share to United Continental's value.
If the company achieves its target of at least a 12% margin, this could mean an additional value of $17.50 per share. Based on these projections, the firm believes United Continental could potentially reach a $200 stock value, assuming the balance sheet metrics reach investment grade status.
The analyst also noted that the third quarter is expected to represent a peak for cost per available seat mile excluding fuel (CASM Ex) with a 6.5% increase, but anticipates a decline in the fourth quarter and a further decrease in 2025. No changes were made to the firm's earnings estimates, but the valuation multiple was increased to 8.5 times the firm's estimated 2025 earnings per share, up from the previous multiple of 7 times.
Lastly, the firm highlighted the importance of the enterprise value to earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EV/EBITDAR) ratio in evaluating United Continental's improving balance sheet.
Historically, airlines have traded at multiples of 4 to 6 times EV/EBITDAR. Using a 6 times multiple, Seaport Global Securities estimated a $96 stock price based on their 2025 outlook and $122 based on their 2026 outlook.
In other recent news, United Airlines Holdings (NASDAQ:UAL) reported a solid third quarter for 2024, with a 2.5% year-over-year increase in revenue to $14.8 billion. The company also highlighted improvements in domestic yield and operational efficiency, even as consolidated TRASM saw a 1.6% decline. As part of its capital allocation strategy, United Airlines initiated a $1.5 billion share repurchase program.
In terms of customer experience, United Airlines' efforts are paying off, as indicated by a 5 point year-over-year increase in its Net Promoter Score. The company's MileagePlus program and corporate travel segment also demonstrated strong performance, with revenues increasing by 11% and 13% respectively.
Looking ahead, United Airlines anticipates improved capacity dynamics in 2024 and projects Q4 earnings per share between $2.50 and $3. The company also expects a double-digit pretax margin by 2026 and has set targets for margin expansion and free cash flow conversion over the next few years.
However, potential challenges lie ahead, including capacity and yield pressures from competitors, the impact of Boeing (NYSE:BA)'s production delays on aircraft supply, and the potential influence of the upcoming presidential election on travel demand. Despite these challenges, United Airlines continues to focus on enhancing operational efficiency, customer experience, and financial performance.
InvestingPro Insights
Recent data from InvestingPro adds weight to Seaport Global Securities' optimistic outlook on United Continental (NASDAQ: UAL). The company's P/E ratio of 7.72 aligns with the firm's valuation increase to 8.5 times estimated 2025 earnings per share. This relatively low earnings multiple, combined with UAL's strong financial performance, supports the potential for further stock price appreciation.
InvestingPro Tips highlight that UAL has seen significant returns over various time frames, with a remarkable 79.5% return over the past year and a 74.54% year-to-date price total return. These figures underscore the market's positive sentiment towards the airline, consistent with Seaport's bullish stance.
Moreover, UAL's revenue of $55.99 billion for the last twelve months and a gross profit margin of 33.31% demonstrate the company's robust financial health, which could contribute to the margin expansion discussed in the analysis.
For investors seeking additional insights, InvestingPro offers 15 more tips on UAL, providing a comprehensive view of the company's potential and risks in the evolving airline industry landscape.
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