The last few days have seen dramatic price drops in airlines after United Airlines (UAL) announced better than expected earnings but shocked Wall Street with 4-6 percent capacity growths through 2020.
UAL hit $80 plus after hours beating Q4 estimates of $1.31 with $1.4o, only to plummet nearly $15 by Thursday’s close.This is the same refrain in one or another version. Airlines will go bust again.
Prior to earnings, we debated internally about the large paper profits we have in both UAL and Delta but refrained from selling them because they are cheap on fundamentals. UAL provided guidance. They provided guidance of $6.50-$8.50 for 2018 and showed how capacity growth could lead to $11-13 per share in EPS by 2020. It’s impossible to find any large cap stocks trading for cheaper multiples than the airline group.
Is this a rational reaction? Hardly.
If you believe UAL is acting imprudently or if you can’t believe the management, why would the entire sector plummet the way it has? That’s crowd behavior believing a competitive response will harm the entire industry. I doubt if Warren Buffett is running with the crowd, however, we won’t know that for several weeks until the next 13-F is filed.
My own thoughts are that adding 4-6 percent capacity growth is not an imprudent thing to do at all. Airlines are flying with decent load factors and the economy is projected to pick up steam. Business travel should be robust. The International Air Transport Association expects the number of passengers flying to double by 2036, at an average 3.6 percent CAGR. United is investing to stay relevant and make up for past timidity.
I reiterate what BOAML analyst Andrew Didora says, “We view any weakness in the stock as a particularly good buying opportunity. Reiterate Buy.”