Where Will United Continental Go Next?

With shares of United Continental (NYSE:UAL) trading around $41, is UAL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

United Continental is a holding company and its principal wholly owned subsidiaries are United Air Lines and Continental Airlines. The company transports people and cargo through its mainline and regional operations; it also has contractual relationships with various regional carriers to provide regional jet and turboprop service branded as United Express. Companies and consumers worldwide look to travel at increasing rates since air travel is quicker and is becoming less expensive. As costs decrease and flights become more efficient, United Continental stands to see soaring profits as consumers and businesses look to travel more than ever.

Usually when a company gets downgraded, as United Continental was today by Imperial Capital, the analysts usually sees a change of some sort that impacts future earnings. United Continental, however, was downgraded for not being Delta Air Lines (NYSE:DAL) or American Airlines (NASDAQ:AAL). Imperial’s Bob McAdoo and Scott Buck explain: United Continental’s presentations and published plans will take at least four years to close $2bn of the gap on American Airlines/Delta Air Lines margins and returns. With that, we believe it may also take four years for United Continental shares to close the gap with shares of Delta Air Lines and American Airlines. United Continental’s November 2013 Investor Day presentation outlined a four-year $2bn program of cost and revenue improvement. Importantly, during those four years, Delta Air Lines and American Airlines will be similarly working to increase earnings. While we believe United Continental’s published objectives are logical and their efforts will likely reduce costs and increase revenues, in our opinion, the scope and scale of the overall plan seem myopic in the post-merger context of what was recently the largest airline in the world. We believe the list of objectives addressing how United Continental’s results will be moved to higher levels seemed more likely to be found in a typical operating department’s annual budget presentation than in a corporate presentation as to how United Continental’s results would be lifted to record levels. The outlined operating adjustments, such as reducing employee overtime, while important, will not close the gap with Delta Air Lines and American Airlines, in our view.

T = Technicals on the Stock Chart Are Mixed

United Continental stock has struggled to make significant progress over the past couple of months. The stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, United Continental is trading between its rising key averages which signal neutral price action in the near-term.

UAL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of United Continental options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

United Continental options

43.83%

50%

48%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Average

Average

August Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on United Continental’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for United Continental look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

31.75%

119.75%

4,800.00%

35.96%

Revenue Growth (Y-O-Y)

-0.29%

7.21%

3.24%

0.62%

Earnings Reaction

-9.83%

-1.52%

1.13%

-1.91%

United Continental has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about United Continental’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has United Continental stock done relative to its peers, Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), JetBlue Airways (NASDAQ:JBLU), and sector?

United Continental

Delta Air Lines

Southwest Airlines

JetBlue Airways

Sector

Year-to-Date Return

8.86%

42.01%

42.94%

24.30%

30.52%

United Continental has been a poor relative performer, year-to-date.

Conclusion

United Continental provides access to quick and efficient air travel to consumers and companies across the nation. The company today was downgraded by Imperial Capital. The stock has struggled to make significant progress over the past couple of months and is currently pulling back. Over the last four quarters, earnings and revenue figures have been increasing. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, United Continental has been a poor year-to-date performer. WAIT AND SEE what United Continental does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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