Yahoo Finance Is United Continental Holdings Inc (NYSE:UAL) A Buy At Its Current PE Ratio?
United Continental Holdings Inc (NYSE:UAL) is trading with a trailing P/E of 9.4x, which is lower than the industry average of 10.9x. While UAL might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for United Continental Holdings
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for UAL
Price-Earnings Ratio = Price per share ÷ Earnings per share
UAL Price-Earnings Ratio = $69.54 ÷ $7.38 = 9.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to UAL, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since UAL’s P/E of 9.4x is lower than its industry peers (10.9x), it means that investors are paying less than they should for each dollar of UAL’s earnings. Therefore, according to this analysis, UAL is an under-priced stock.
A few caveats
Before you jump to the conclusion that UAL is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to UAL, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with UAL, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing UAL to are fairly valued by the market. If this does not hold, there is a possibility that UAL’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of UAL to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for UAL’s future growth? Take a look at our free research report of analyst consensus for UAL’s outlook.
Past Track Record: Has UAL been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of UAL’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
