It's not Nvidia. Instead, it's an old-economy transportation stock in United Airlines (UAL -3.93%). At the time of this writing, the stock is up 168% over the last 12 months, beating out Nvidia and other high-profile technology names. At this point, investors might think the stock should be pausing in its run-up to take a breather. However, that's not how Wall Street sees it. Analysts have recently upgraded their price targets on the stock, including one at Morgan Stanley who has a $140 target on it, which would equate to a 36% upside. Here's why United Airlines is an outstanding stock to buy now.
United Airlines stock is taking off
Companies rarely fire 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."
NASDAQ: UAL
Key Data Points
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 their pricing rather than adjusting it 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 corporate travelers and trans-Atlantic travelers (two demographics of relative strength for United Airlines) also creates growth opportunities for United. On the recent earnings call, Nocella noted that "flown business revenue" grew 16% year over year in the fourth quarter. "Premium passenger revenues increased 10% year-over-year and premium cabin unit revenues were positive," he also noted, "Both trends have persisted throughout the year."
Image source: Getty Images.
The improved pricing environment has resulted in a return to growth for United on 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) resulted in significantly improved operating revenue. That more than offset an increase in operating expenses, leading to a 50.6% increase in operating income.
|
Metric |
Q4 2023 |
Q1 2024 |
Q2 2024 |
Q3 2024 |
Q4 2024 |
|---|---|---|---|---|---|
|
TRASM growth (YOY) |
(4.2%) |
0.6% |
(2.4%) |
(1.6%) |
1.6% |
|
Operating revenue growth (YOY) |
9.9% |
9.7% |
5.7% |
2.5% |
7.8% |
|
Operating expenses growth (YOY) |
14.6% |
8.4% |
3.1% |
4.2% |
4.5% |
|
Operating income growth (YOY) |
(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 to $13.50, representing an 8.3% to 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 growth in revenue per available seat mile (RASM) 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 for investors
Relatively high interest rates are curtailing discretionary spending in some areas, but that doesn't appear to be the case for the aviation industry. In addition, the return of higher-margin corporate travel and ongoing growth in the premium market are contributing to United's strengths. Pricing in the trans-Atlantic travel 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 estimate 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 forward price-to-FCF multiple of less than 10 for 2025.
As always, the travel industry faces cyclical risks, but United's valuation and its prospects make the risk/reward calculation favorable for investors today.
