Shares of major airline United Airlines Holdings Inc. (UAL, Financial) are flying high after its fourth-quarter results cruised past analysts' estimates and forecasted for further strength this year.
The stock is up more than 30% year to date and will likely continue trading in the green in 2023.
Travel demand continues to improve despite higher fares due to rising costs for fuel, labor and other expenses. According to Bank of America, system net sales on Jan. 8 climbed a remarkable 4.6% over pre-pandemic levels. Therefore, it seems the sector will remain robust this year and should push United and other airline stocks to new highs.
Airlines have been a particularly strong performer in the first few weeks of 2023 as the transportation industry has climbed nearly 7%. Despite storms in December impacting holiday travelers, investors continue to have faith in the airline industry's recovery following the pandemic. However, another problem has hit the travel industry hard in recent weeks, raising speculation about a potential weakness in the transportation system.
In early January, the Federal Aviation Administration suffered an outage in a key safety system. The FAA's Notice to Air Missions system failed, causing problems with operations throughout U.S. airspace and leading the agency to order a temporary halt to all domestic flight departures. Generally, however, airline stocks were not overly affected by the news.
Stellar fourth-quarter results
Over the past three years, United Airlines has made large investments in tools, infrastructure and personnel. In a statement, CEO Scott Kirby noted that this preparation has allowed the company to jump-start on its future goals. Organizationally speaking, these investments are essential and will no doubt be instrumental in helping it speed past the competition. And recent results affirm that the legacy carrier is heading in the right direction.
On Tuesday, United reported its fourth-quarter and full fiscal 2022 results, which came out ahead of analysts' estimates on both the top and bottom lines. It posted operating revenue of $12.4 billion for the three months ended Dec. 31, beating expectations by $0.2 billion. Moreover, it generated adjusted earnings per share of $2.46, which topped estimates by 36 cents.
In addition, the company recorded an $843 million profit with a 14% increase in revenue compared to the same period in 2019.
For fiscal 2022, United saw adjusted net income of $831 million.
Based on these strong results, United appears to be well on its way to recovery. Thanks to strong travel demand and higher fares, United's outlook for early 2023 also exceeded Wall Street's estimates.
The company projected a 50% increase in revenue during the first quarter of the year compared to the same period in 2022. The airline expects to post earnings per share between 50 cents and $1, which will likely beat estimates again. Fueling this profit surge is a 20% year-over-year growth in airborne passengers, creating an atmosphere of optimism for the new year.
Spending spree is a concern
United Airlines' plan to purchase hundreds of aircraft from Boeing Co. (BA, Financial) reinvigorated fears of aggressive spending. The airline will save money in the long run by owning the asset, but this purchase can also be seen as a long-term investment.
While its $8.5 billion in capital expenditures this year are worrying, the company is likely to post over $3 billion in earnings, which should stem the bleeding somewhat.
Its massive spending, though, could be justified to an extent, given that air travel and gross domestic product levels are still far below pre-Covid benchmarks. With the innovations and protocols, many of the big players in the industry are looking forward to surpassing the levels seen before the pandemic.
Moreover, United has widely acknowledged the challenges ahead in light of the staffing issues plaguing airlines due to industry-wide, pandemic-related churn and plane shortages. On top of this, it has identified outdated technology as an additional pressure restricting capacity levels throughout 2022.
To confront this challenge, United is taking a two-pronged approach by launching initiatives to bring new talent into the field and focusing on improving certain procedures and facilities internally. For example, through its Calibrate apprenticeship program and Aviate Academy, the company hopes to build up pilot and crew numbers for the near future.
Takeaway
United Airlines dished out a spectacular fourth quarter, which was marked by healthy growth across its business.
Moreover, its outlook for the year is a breath of fresh air for investors, with additional aircraft and personnel expected to join the company to make its operations more efficient. Therefore, with all these factors considered, it can be safely said that United Airlines is a potential portfolio winner for investors who have faith in the company's vision and ability to execute.
At this point, it seems United's stock is undervalued as it trades at just 0.3 times forward sales estimates, 36% lower than its five-year average, which significantly adds to its appeal.
