We came across a bullish thesis on United Airlines Holdings Inc. (NASDAQ:UAL) on ValueInvestorsClub by sondasy. In this article, we will summarize the bulls’ thesis on UAL. The company’s shares were trading at $58.00 when this thesis was published, vs. the closing price of $95.43 on Jan 02.
A wide aerial view of an airport and commercial aircrafts in the sky.
UAL provides air transportation across the globe. The company transports people and cargo through its mainline and regional fleets. It also offers catering, ground handling, flight academy, and maintenance services for third parties.
UAL seeks to benefit from the shortage of supplies in the aviation industry. The entire spectrum of the manufacturing supply chain is plagued with problems that have led to a shortage in the production of aircraft. Boeing has been able to deliver 400 units per year for the last six years. This is half the required output. Similarly, Airbus has an annual shortfall of 100 units. Pratt and Whitney, a supplier of engines, has faced quality control issues and this could lead to the grounding of existing flights as well. The impact of these issues could culminate in 600 planes being taken out of service in the next two years.
Growth in demand since the pandemic in 2019 has ensured that the existing fleet has utilization levels that are at a peak. The consolidation in the industry through bankruptcies has also led to a decrease in supply. If lease rates are used as a proxy for pricing, airline companies can benefit from improved margins in the future.
As far as valuation is considered, the EPS for 2027 is expected to be $20+, implying a P/E multiple of 4.8 at the current price. In the last upcycle, the multiple realized was 8-10x. If this figure is factored in, UAL should double in the next three years. UAL has a healthy cash balance of $15 billion and is expected to repurchase its shares, potentially enhancing the returns further by amplifying its EPS.
While we acknowledge the potential of UAL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than UAL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.