Over the last six months, United Airlines’s shares have sunk to $86.35, producing a disappointing 17.1% loss while the S&P 500 was flat. This might have investors contemplating their next move.
Is now the time to buy United Airlines, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think United Airlines Will Underperform?
Even with the cheaper entry price, we don't have much confidence in United Airlines. Here are three reasons we avoid UAL and a stock we'd rather own.
1. Weak Growth in Revenue Passenger Miles Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like United Airlines, our preferred volume metric is revenue passenger miles). While both are important, the latter is the most critical to analyze because prices have a ceiling.
United Airlines’s revenue passenger miles came in at 68.25 billion in the latest quarter, and over the last two years, averaged 5% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
United Airlines’s operating margin has generally stayed the same over the last 12 months, and we generally like to see margin increases due to economies of scale and cost efficiency over time.
3. Free Cash Flow Projections Disappoint
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts’ consensus estimates show they’re expecting United Airlines’s free cash flow margin of 4.3% for the last 12 months to remain the same.
Final Judgment
United Airlines falls short of our quality standards. After the recent drawdown, the stock trades at 6.9× forward P/E (or $86.35 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward one of our all-time favorite software stocks.
Stocks We Would Buy Instead of United Airlines
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