It's not Nvidia. Instead, it's an old economy transportation stock in United Airlines (UAL 1.34%). At the time of writing, the stock is up 168% over the last year, beating out Nvidia and other high-profile technology names. At this point, investors might think the stock deserves a breather. However, that's not how Wall Street sees it, and analysts have recently upgraded price targets on the stock, including one at Morgan Stanley, who has a $140 target on it, implying 36% upside. Here's why United Airlines is an outstanding stock to buy.
United Airlines stock is taking off
A company rarely fires on all cylinders, but United Airlines is doing that now. Back on the third quarter 2024 earnings call, Chief Commercial Officer Andrew Nocella signaled to investors to expect an excellent fourth quarter and start to 2025 when he remarked: "United expanded slower than most during the first three quarters of the year when capacity dynamics were less favorable, but importantly, our timing was right, tilting our growth to the quarter where the industry conditions would be the best."
In a nutshell, United Airlines management was counting on the airline industry to reduce unnecessary capacity over the summer and fall, leading to an improved pricing environment and profit growth. That's especially relevant for airlines like United and Delta, which tend to maintain pricing rather than adjust pricing to improve load factors (percentage of available seat capacity filled by passengers).
The good news is that's what happened, and the even better news is that the return of the corporate traveler and transatlantic traveler (two areas of relative strength for United Airlines) also creates growth opportunities for United. For example, on the recent earnings call, Nocella noted that "flown business revenue" grew 16% in the fourth quarter year over year, and "Premium passenger revenues increased 10% year-over-year, and premium cabin unit revenues were positive. Both trends have persisted throughout the year."
Image source: Getty Images.
The improved pricing environment results in the return to growth of a key industry metric: total revenue per available seat mile (TRASM). In the quarter, a 1.6% year-over-year increase in TRASM and a 6.2% increase in available seat miles (ASM) significantly improved operating revenue. That more than offset an increase in operating expenses, leading to a 50.6% increase in operating income.
|
United Airlines Year Over Year Growth |
Fourth Quarter 2023 |
First Quarter 2024 |
Second Quarter 2024 |
Third Quarter 2024 |
Fourth Quarter 24 |
|---|---|---|---|---|---|
|
TRASM |
(4.2)% |
0.6% |
(2.4)% |
(1.6)% |
1.6% |
|
Operating Revenue |
9.9% |
9.7% |
5.7% |
2.5% |
7.8% |
|
Operating Expenses |
14.6% |
8.4% |
3.1% |
4.2% |
4.5% |
|
Operating Income |
(27.5)% |
N/A |
27.2% |
(10)% |
50.6% |
Data source: United Airlines presentations.
More growth to come in 2025
With excellent trading momentum leaving 2024 and entering 2025, management expects another year of strong growth. The full-year outlook calls for adjusted diluted earnings per share of $11.50-$13.50, representing an 8.3%-27% increase on 2024's figure of $10.61.
That outlook is partly driven by a continuation of the trends discussed above and a return to revenue per available seat miles (RASM) growth in the domestic market. United increased its domestic capacity by 7.8% in the fourth quarter, and its domestic RASM declined by 1.6%, but Noceall expects "domestic RASM" to "turn solidly positive in Q1."
Image source: Getty Images.
What it means to investors
Relatively high interest rates are curtailing discretionary spending areas, which doesn't appear to be the case for the aviation industry. In addition, the return of higher-margin corporates and ongoing growth in the premium market play a role in United's strengths. Pricing in the transatlantic market is also likely to stay strong as long as there are issues with wide-body airplane deliveries (such as the Boeing 777X, which is now expected to have its first delivery in 2026 compared to an original estimation of 2020).
Furthermore, the ultra-low-cost carriers are struggling (Spirit Airlines has filed for bankruptcy), and the market is moving toward United Airlines. Everything points to the airline having another strong year, and management's forecast of $3.4 billion in free cash flow (FCF) puts it on a price to FCF multiple of less than 10 times FCF for 2025.
As always, the travel industry faces cyclical risks, but the valuation and current prospects make the risk/reward calculation very favorable for the bulls.
