United Continental (UAL) Gains on Expansion Amid Cost Woes

Despite high operating expenses, shares of United Continental Holdings, Inc. UAL have fared well in a year’s time. The stock has surged 47.8%, against the industry’s decline of 12.1%.

The company has an impressive surprise history. It beat earnings estimates in three out of the trailing four quarters, the average being 2.7%.

Moreover, United Continental's efforts to expand operations are impressive. To this end, in November 2018, the carrier reached a joint business agreement with Copa Holdings CPA and Avianca (including several affiliates) to bolster Latin American presence. The company is adding new flights constantly, in sync with expansion motive. We are also encouraged by the company's efforts to reward shareholders in the form of buybacks. The company’s efforts to modernize fleet look encouraging. It is constantly adding more planes to its fleet and removing outdated ones.

Furthermore, United Continental is being aided by strong demand for air travel.  As a result of the robust demand, passenger revenues, which contribute significantly to the top line, increased 8.8% in the first nine months of 2018. Strong passenger revenues are likely to boost the top line in the fourth quarter of 2018 as well. Low tax rates as a result of the current tax law (Tax Cuts and Jobs Act) should also aid results.

Notably, we are positive about the carrier's bullish guidance for current-year earnings. United Continental projects 2018 earnings in the range of $8-$8.75 per share compared with the previous outlook of $7.25-$8.75. The carrier is well poised to achieve 2020 adjusted earnings per share guidance of $11-$13. Also, the company also has an impressive VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of all three scores.

In spite of these tailwinds, the company has its own share of challenges. Along with the current downward trend, high fuel costs are expected to dent the bottom line in the fourth quarter of 2018. The metric is projected in the range of $2.41-$2.46 in the final quarter. Expenses pertaining to the labor front are also expected to weigh on bottom-line results.

United Continental's high-debt levels add to woes. Currently, the company has a debt-to-equity ratio of 140.8%, compared with the industry’s figure of 90.7%. High debts may limit future expansion.

Considering these headwinds, we advise investors to wait for a better entry point before investing in the shares of United Continental. The company’s Zacks Rank #3 (Hold) seems to suggest the same.

Stocks to Consider

A few better-ranked stocks in the Zacks Transportation sector are CSX Corporation CSX and Frontline Ltd. FRO, each sporting  a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of CSX Corporation and Frontline have gained 9.2% and 23% in the past six months, respectively.

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