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.