It might be the same for you…
But when digesting financial news, it can take me two or three reads to get through because of how astounding Wall Street is sometimes.
Case in point, their “favorite” stock right now.
You’d think it was Nvidia (NVDA). Maybe Microsoft (MSFT). I’d even put Meta (META) in the running after the last earnings report.
But I’m wrong.
The answer is, unbelievably, United Airlines (UAL).
13 analysts on Wall Street cover the stock, 77% share buy ratings, and the consensus price target in 12 months is $63.46.
This implies a 50% move from prices today, which is the highest implied price from analysts for any stock on the market.
Is it worth it? Let’s see…
How We Got Here
The main reason for the bullish ratings is that United outperformed expectations for fourth quarter earnings and has a positive outlook for 2024, including setting new operational records and surpassing Wall Street's earnings and revenue forecasts.
The guidance is starkly different from Southwest’s forecast.
UAL hit $2 earnings per share (EPS) on $13.6 billion in revenue, beating the expected $1.70 per share on $13.54 billion.
This performance, combined with an ambitious adjusted earnings projection for 2024 between $9 and $11 per share, which surpasses the average analyst forecast, has fueled optimism among investors and analysts alike.
The airline's resilience and strategic restructuring under its current leadership have positioned it well for the long term, so the story goes.
Additionally, United Airlines' solid quarter was driven by high demand and a record $14.48 billion in net revenue, up 12.4% from the previous year.
The increase in revenue was supported by a 15% rise in capacity and passengers, with premium and rewards traffic significantly contributing to the results.
It’s all well and good, but the problem is that Wall Street analysts often project future prices by staring at spreadsheets of past prices.
The Tailwinds Are Too Heavy
- Boeing Issues
Like many other carriers, United has faced challenges due to issues with Boeing (BA)'s 737 MAX aircraft.
The grounding of these planes has led to operational disruptions and financial strain.
The Federal Aviation Administration (FAA)'s scrutiny and subsequent grounding of these aircraft have resulted in significant losses for airlines, with the 737 MAX crisis costing Boeing over $18 billion as of early 2020.
And for existing and future aircraft, it won’t cost pennies for carriers like United to maintenance their existing fleet or switch suppliers (to Airbus).
- Wars in Gaza and Ukraine
The geopolitical situation, including the wars in Gaza and Ukraine, can have profound effects on global travel patterns.
Conflict zones often lead to closed airspaces, rerouted flights, and reduced passenger demand for certain regions, which can increase operational costs and decrease revenues for airlines.
The ongoing conflict in Ukraine, for example, has led to sanctions and airspace closures affecting many European airlines, potentially hinting at broader impacts for the global aviation industry.
- Possible Recession
The threat of a recession looms large over the airline industry.
In economic downturns, both leisure and business travel tend to decline sharply as consumers and companies cut back on expenses.
Historical data from the International Air Transport Association (IATA) shows that air travel demand has significantly dropped during past recessions, with a 0.5% decrease in global GDP leading to a 1% decline in passenger kilometers traveled.
The jury is still out about a U.S. recession ahead, but one thing’s clear: any sounding of the alarm is bad news for United.
- Possible Oil Cost Increases
Fuel costs are one of the most significant expenses for airlines, accounting for about 25% of total operating costs on average.
Fluctuations in oil prices can therefore have a substantial impact on profitability.
The U.S. Energy Information Administration forecasts potential volatility in oil prices due to geopolitical tensions, changes in supply, and global economic factors, which could lead to increased operational costs for airlines.
If OPEC+ production cuts or U.S. production flounders a bit, global prices could rise and airlines will take a hit.
So… will UAL rise 50% by next March?
Who knows – and who cares. I doubt they will. There’s too much of an “unknown” in the market right now.
But what we do know is that there are much, much better choices. Like our updated list of stocks to buy.
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